Brad Jones: Bagehot and the lender of last resort – 150 years on

Speech by Mr Brad Jones, Assistant Governor (Financial System) of the Reserve Bank of Australia, at the 36th Australasian Finance & Banking Conference, organised by the University of New South Wales, Sydney, 14 December 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Good morning. This event is a highlight on the academic conference circuit so I thank the Institute of Global Finance for the invitation to offer some remarks today.

This year marks the 150th anniversary of Walter Bagehot's immortalised Lombard Street, where he spelt out the terms by which central banks should act as the 'lender of last resort' to help stabilise the financial system. As the banking turmoil offshore earlier this year demonstrated, policymakers continue to wrestle with the issue 150 years later.

I will begin today with a brief history of the origins of emergency central bank lending, internationally and in Australia. I will then discuss how the application of last resort operations has evolved around the world in more recent times. Finally, I will conclude with a review of how these wider developments have been reflected in aspects of the Reserve Bank's own framework.

Financial stability and the lender of last resort – a brief history

Maintaining financial stability has been a cornerstone responsibility for central banks for as long as they have been in existence. Why so? Because financial stability is a public good and central banks occupy a unique position at the heart of the financial system, reflecting their ability to create safe liquid assets on demand. But how central banks have discharged this responsibility has evolved and been subject to much debate, right up to present times. Their role as lender of last resort – nested in a wider set of financial stability responsibilities – has long featured in this discussion.