Financial Markets and Institutions Assignment Example | Topics and Well Written Essays - 2250 words

Financial Markets and Institutions - Assignment ExampleThe basic foundation of a central cuss serving as a lender of prevail resort is that in an economy, panics bottom occur which leads to swan runs. In such a situation, those celebrateing deposits in commercialised posits withdraw their capital from the bank as a result of scotch speculation or fear over negative economic consequences. During a bank run, commercial banks can become insolvent, requiring the assistance of an institution (the central bank) to ensure that banks maintain liquidity is such a phenomenon occurs.Being the lender of last resort has become controversial, especially considering events during the juvenile global economic recession where many central banks injected capital into banks that were facing insolvency. Over-reliance on the central bank impacts other sectors in an economy. This essay explores the role of the central bank, emphasising why being a lender of last resort maintains many controvers ial implications from multiple perspectives. Evidence is that the controversy hails from irresponsible banking management and from poor monetary policy developments concocted by the central bank itself.Central banks supply liquidity insurance to the commercial banking formation which consequently endows liquidity insurance to other aspects of an economy, including corporations. Funds available for this action in a central bank encompasses notes held by public investors and reserves (deposits) sustained by a nations banks. These funds are manifested by the central bank as a result of autonomous will insure that its value is comparable to products and services value in the economy. It is through these activities that an economy achieves macroeconomic stability. Concurrently, the central bank mandates the reserves that must be held by banks to insulate them from potential bank runs. Therefore, the central bank guarantees that commercial banks meet stringent standards of ensuring sol vency.However, in 2007, many commercial