Counterparties that experienced a functional lender of last resort during past episodes of liquidity distress may become tempted to “bank” on the safety net provided by the central bank. As observing and learning agents, they form expectations based on their experience and project them forward.
An illustration of how the Lead Supervisor model can work is the preliminary high level agreement between DNB and the United Kingdom Financial Services Authority (FSA) regarding the supervisory consequences of a possible merger between ABN AMRO and Barclays. In this specific case, we have been able to come to good, pragmatic and transparent agreements.