Central bank as LLR: 1763 crisis and modern readiness

Steven Maijoor of DNB highlighted the critical role of central banks as lenders of last resort (LLR), drawing lessons from the 1763 Amsterdam crisis and the 2023 financial turmoil.

The 1763 crisis, sparked by the bankruptcy of banker Leendert Pieter de Neufville, led to a cross-border credit crunch across Europe, exposing vulnerabilities like leverage and maturity mismatch due to the absence of LLR intervention.

Maijoor connected this to 2023, where cases like Silicon Valley Bank and Credit Suisse demonstrated that while LLR tools now exist, banks' operational readiness to use them, including sufficient collateral prepositioning, remains a key challenge.

The Swiss National Bank's Emergency Liquidity Assistance (ELA) to Credit Suisse, requiring a government guarantee due to insufficient collateral, served as a powerful modern lesson in preparedness.

Maijoor addressed the misperception that using central bank operations in normal situations triggers supervisory questions, stressing the need to avoid market stigma.

He clarified that while supervisors monitor banks' reliance on central bank funding, regular operations are a routine and integral component of day-to-day liquidity management and part of a diversified funding mix.

Maijoor emphasized clear communication from supervisors and central banks to correct this view, referencing the Buch and Schnabel blog on 'Managing liquidity in a changing environment.'

He advocated for continued efforts to normalize standard refinancing operations, ensuring banks comfortably utilize these facilities for overall financial system resilience.