Lender of Last Resort and Financial Systemic Risks in Times of Economic Stability: Evidence from 55 Countries

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Authors: Wenlong Miao, Yuxian Ma, Yuanyuan Huo
Cited by: 1
References: 27

Abstract

As a cornerstone of the modern financial safety net, the Lender of Last Resort (LOLR) is essential in mitigating liquidity crises and containing financial contagion. However, during periods of economic stability, risk-taking incentives in the banking sector may undermine its effectiveness. Using quarterly panel data from 55 countries over the period 2010–2023, this study employs a two-way fixed effects model to assess the impact of LOLR support on systemic financial risk and its transmission mechanisms. We find that LOLR support significantly increases systemic risk during stable economic periods. Mechanism analysis indicates that this effect is channeled through the erosion of bank asset liquidity, expansion of financial leverage, and deterioration in asset quality. Moreover, the adverse impact is more pronounced in emerging economies, bank-dominated financial systems, countries with low capital adequacy ratios, underdeveloped regulatory frameworks, and lower levels of digital technology adoption. This study provides cross-country evidence on the potential negative consequences of central bank rescue functions during calm periods and offers important policy insights for optimizing the LOLR framework and building a more resilient financial safety net.

Fields of Study & Subjects

Banking stability regulation efficiency Financial Distress and Bankruptcy Prediction Microfinance and Financial Inclusion

Publication details

Journal / source
International Journal of Financial Studies
Publisher
MDPI AG
Volume
14
Issue
1
Pages
9–9
Publication date
6 January 2026
Language
EN