Briefly analyse the Lender of Last Resort facility.

The idea of LOLR was introduced by Walter Bagehot in 1873 . He developed a system where the central bank would provide a temporary liquidity injection into a single bank or the banking system at a time of crisis. Bagehot's idea was that a short-term temporary loan should be given to illiquid banks and ones which are insolvent should be allowed to fail. The effect being that this would help to reduce systemic risk and the collapse …

…LOLR facility needs to be used it should done so exceedingly sparingly and only with compliance to the moral hazard reduction policies detailed above. Once the crisis has been averted it should be examined as to why it occurred. Legislation should then be put in place to ensure the same situation will not arise again. As the best way to ensure a strong banking industry is to avoid having to use such a prevention method.