Lender of last resort in China: operating mechanism, legal foundation, and the financial stability implications

Abstract

As a crucial component of the financial safety net, the central bank's Lender of Last Resort (LOLR) regime plays a vital role in maintaining financial stability. This paper examines the LOLR frameworks in the United Kingdom and United States before analysing China's current LOLR regime, its legal foundations, and potential risks. The study explores the unique characteristics of China's financial system and how they shape its LOLR practices. We identify several challenges within the existing Chinese LOLR regime, including regulatory gaps, moral hazard concerns, and the need for enhanced supervisory. Drawing on international experiences and China's specific context, we propose a series of recommendations to strengthen the effectiveness and resilience of China's LOLR regime. These suggestions aim to bolster the central bank's capacity to respond to financial crises, mitigate systemic risks, and ensure the long-term stability of China's financial sector. By addressing these critical aspects, this research contributes to the ongoing dialogue on optimizing financial safety nets in emerging economies and underscores the importance of a robust LOLR regime in China's evolving financial landscape.