But in modern times, where financial markets have become another important source of funding, the lender-of-last-resort role of central banks has evolved. Today’s lender of last resort can be thought of as a liquidity provider of last resort—ready to resolve market-wide stresses when the financial system cannot find its footing or when debt markets are frozen.
At the same time, Bagehot noted that while it was important to reduce financial stress, it was also critical to do so in ways that mitigate moral hazard. This remains true today. Moral hazard emerges whenever market participants or other economic actors feel that they can engage in risky behaviour without bearing consequences if things go wrong.