Introduction

Providing emergency liquidity assistance (ELA) or being the lender of last resort (LOLR) are considered to be amongst the most important tasks of central banks, and literature on the topic is correspondingly abundant (see e.g. Freixas et al. 1999, for an overview). To avoid confusion relating to the specific definitions given and uses made of these terms in the literature and in the central banking community, this chapter uses the broad concept of ‘central bank financial crisis management’ (FCM), which encompasses ELA and LOLR. Apart from some important general clarifications of direct usefulness for the practitioner (from Bagehot 1873 to e.g. Goodhart 1999), the literature on FCM takes mainly an academic perspective of microeconomic theory (e.g. Freixas and Rochet 1997; Repullo 2000; Freixas et al. 2003; Caballero and Krishnamurthy 2007). While this microeconomic modelling of the functioning of FCM is certainly relevant, doing practical FCM at the right moment and in the right way requires more than that. In particular, it requires three disciplines of applied central banking, namely central bank liquidity management, central bank risk management and prudential supervision. The role of risk management has been stressed recently by W. Buiter and A. Sibert in their internet blog posted on 12 August 2007, just days after the break-out of the financial market turmoil: