To stabilize financial networks during severe liquidity runs, central banks activate emergency credit backstops, balancing targeted credit facilities with broad market liquidity injections.
Key Emergency Lending Backstops
- The Discount Window: Provides targeted, collateralized overnight loans directly to individual banks facing temporary cash shortages. These emergency loans carry higher, punitive interest rates to mitigate moral hazard.
- Large-Scale Open Market Injections: The central bank floods the broader banking network with reserves through repo expansions and quantitative asset purchase programs, lowering short-term money market interest rates and stabilizing system-wide liquidity.
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