1 Second, the Bank of Canada acts as a lender of last resort to solvent but illiquid institutions. 2 These support mechanisms are carefully crafted to discourage banks from taking inappropriate risks while still providing the necessary support. They are also accompanied by a robust regulatory framework.
Bankers implicitly accept a social contract that gives them access to liquidity support in times of a stress in return for regulation of their behaviour at all times. Banks perform a third essential role of credit intermediation, channelling funds from savers to investors. This allows savers to diversify their risk and all of us to smooth our consumption over time.