The chief executive of a large American bank once approached Paul Volcker, then chairman of the Fed, to ask him how he would respond if the banker were to seek a bail-out. Mr Volcker replied that he would be glad to discuss the request with his successor. The story is apocryphal, but it captures the tough love expected from central bankers as lenders of last resort.rnCentral banks must demand a price for lending when others will not. But they must not be too severe. When demand for liquidity spiked in early August, it was akin to a run on the whole banking system. Banks suddenly had to provide credit to entities that had previously relied on the commercial-paper market for funding. This strained their liquid resources, in much the same way as a long queue of depositors would have done. As pressures rose, interbank lending dried up and central banks felt they had to step in and lend freely.
展开▼
