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.
Such threats are real as the default rates of subinvestment grade borrowers could increase. Credit derivatives, which have proliferated in recent years and whose pricing has depended on relatively untested models and default correlation assumptions, may in particular be vulnerable to corrections.