Central Banks as Investors of Last Resort - the Case of the Federal Reserve System and the European Central Bank - Part. 1
Abstract
The balance sheet size of all major central banks is probably the most palpable consequence of the worst financial crisis of our generation, which broke off more than a decade ago. Central banks have arguably been one of the most important actors in the fight against the 2007-8 financial crisis and the ensuing economic contraction.
Central banks of in particular the United States and the Eurozone have undertaken unprecedented measures and significantly expanded their lender of last resort authorities. Rather than lenders of last resort, it would be more accurate to describe their role as investors or even crisis managers of last resort.
While the swift and vigorous reaction from the Federal Reserve System is commonly believed to have hived off the collapse of the American and global financial system, it was not without controversies. At the same time, although the European Central Bank has not gone as far as its US peer due to more narrowly tailored powers, it certainly stretched them to the extent possible.
The article aims at briefly describing some of the measures implemented by the two prominent central banks on both sides of the Atlantic in response to the 2007-08 financial crisis and to assess how their actions have shaped the traditional lender of last resort concept. The first part of the article in particular focuses on selected actions of the Federal Reserve System.