RESEARCH DISCUSSION PAPERS

A History of Last-resort Lending and Other Support for Troubled Financial Institutions in Australia

Bryan Fitz-Gibbon,Marianne Gizycki

RDP2001-07

October 2001

This paper surveys the history of last-resort lending and other support provided to financial institutions in Australia and compares the practical implementation of lender-of-last-resort policy with policy prescriptions derived from the theoretical literature. Last-resort support serves to counter the market failures that can see fundamentally sound financial institutions fail due to a lack of liquidity, and to protect the economy from the systemic costs of such failures. The provision of lender-of-last-resort support, however, creates moral hazard costs.