The lender of last resort system means that when a commercial bank has a liquidity crisis, the central bank (China People's Bank) assumes the role of lender of last resort. China's "China People's Bank Law" does not clearly stipulate the lender of last resort system. Only Article 28 "The People's Bank of China may decide the amount, term, interest rate and method of loans to commercial banks according to the needs of implementing monetary policy, but the loan term shall not exceed one year" has laid the institutional foundation.
First, finally, that is, the central bank must have the most basic respect for market autonomy, and only when unpredictable risks are obviously beyond the range that the market (banking system) system can bear can it rescue.
Secondly, the principle of minimum cost. For banks that need assistance, the central bank must analyze and make decisions based on the principle of minimum cost, for example, what is the maximum capital loss that the central bank can finally bear and how much capital cost it will pay. However, this principle is controversial. Some scholars believe that the principle of minimum cost does not apply to the lender of last resort system, because the lender of last resort system is a system to deal with systemic risks, and the cost of financial system collapse is unbearable for the whole country.
Third, the principle of symmetry of rights and responsibilities. Systemic risk comes from the mismatch of rights and responsibilities of financial institutions, and the symmetry of rights and responsibilities is the factor that determines whether to issue loans. Because in general, the central bank has great discretion on whether to provide liquidity assistance, and when the financial institution itself is responsible, the central bank should be cautious about whether to rescue the financial institution and how to rescue it.
Significance of lender of last resort function of central bank;
1. Solve the temporary shortage of funds in solvent banks, thus stabilizing the capital demand of bank customers and solving the problem of bank loan balance.
2. When a commercial bank is in crisis, the lender of last resort can buy assets with ideal quality from the banking system in the open market, thus protecting the interests of depositors and restoring the policy experience ability of banking financial institutions.