The recent financial crises in Japan and the United States have reminded central bankers of the importance of their mandate to serve as lenders of last resort. This article summarizes the key features of the two countries' crises, compares the policy response of the U.S. Federal Reserve with that of the Bank of Japan, and discusses the ways in which these responses have expanded the traditional boundaries of the lender of last resort function. The experience suggests that the conventional tool of liquidity provision, lending funds against risk-free collateral, has become inadequate for dealing with modern financial crises.
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