The importance of lending by the central bank is emphasized in much of the economics literature, where LOLR is often viewed as the optimal policy tool.7 Consider now the opposite approach to dealing with liquidity stress, one that relies largely on the LOLR function of the central bank.
If the problem with complete reliance on selfinsurance is that firms would ration liquidity too tightly in normal times and hoard it in periods of stress, the obvious problem with a readily available LOLR is that firms would maintain only the liquidity needed for operations in normal times and do essentially no self-insuring for periods of stress.