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prevailing interest rate for said instrument or loan. In 1870 Britain the interest rate paid by the
British Government for its annuities was 3.00% therefore a rate of 3.50% would have caused a loss of capital for a bank pledging this instrument as collateral. We also have to consider that a bank has assets higher than its capital so any loss would cause a higher loss of equity for the bank, and it is not in the best interest of the central bank to cause high losses of equity to the firms making up its banking system. Therefore, if the asset has an interest rate of 3.00% a high central bank rate would be 2.50% without causing a leveraged loss of capital to the bank. Take for example the Bank of England's bank rate of 0.10% and the United Kingdom's 10 year Gilt at 0.65% on 14 July 2021.
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security to offer... No advances indeed need be made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business... The great majority, the majority to be protected, are the 'sound' people, the people who have good security to offer. If it is known that the Bank of
England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.
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First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid
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Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good
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High rates that cause losses to the firm may be too high, say higher than the interest rate the firm or bank is earning from the same asset it is placing as good collateral. Therefore, the highest interest to charge a bank for its good collateral without causing losses to it would be the same
156:. Lombard Street was a historic center of the London banking industry from medieval times to the 1980s, from which the book draws its title. When Overend, Gurney and Company suspended payments on 10 May 1866, panic spread across London, Liverpool, Manchester, Norwich, Derby and Bristol.
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early; that no one may borrow out of idle precaution without paying well for it; that the
Banking reserve may be protected as far as possible.
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in understandable language. The book was initially printed in Great
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Notes on
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Since 1873 the book has been reprinted and published many times. See
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Paul Tucker, Deputy
Governor, Financial Stability, Bank of England,
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398:, Bank of Japan 2009 International Conference, 27–28 May 2009, p. 5
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Charles
Goodhart (1999), 'Myths about the lender of last resort.'
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121:Lombard Street: A Description of the Money Market
230:, Chapter 7, paragraphs 57–58), lending by the
418:"The History of Interest Rates Over 670 Years"
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190:At a high rate of interest.
150:Overend, Gurney and Company
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494:"The Unwisdom of Crowds"
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358:: 134–150. January 1874.
313:Bagehot, Walter (1897).
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226:In Bagehot's own words (
447:www.bankofengland.co.uk
75:Henry S. King & Co.
344:by Walter Bagehot and
154:Lombard Street, London
382:International Finance
348:by R. H. I. Palgrave"
263:Lender of last resort
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160:Lender of last resort
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234:in order to stop a
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340:"Review of
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369:The Times
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144:Overview
103:hardback
47:Language
452:14 July
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323:21 July
297:21 July
134:banking
130:finance
101:Print (
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