Solvency As a Fundamental Constraint on LOIR Policy
Paper presented at St Louis Conference to mark anniversary of Diamond/Dybvig Paper on bank runs, St Louis
A little over 150 years ago, on Thursday 10th of May 1866, the Bank of England let one of the largest money market dealers in the world, Overend, Gurney & Co., go to the wall. Facing chaos in the markets, the Bank almost immediately made emergency liquidity available to all and sundry. The raw facts — idiosyncratic rejection, followed by system-wide support — seem strikingly similar to those just over a decade ago when, in the autumn 2008, the Federal Reserve first let Lehman fail but then extended liquidity to Wall Street and beyond.