While this made individual institutions liquid, the market still remained illiquid, thereby showing up the limitation of the LOLR instrument in combating illiquidity. Much like taking a horse to water, a central bank can infuse liquidity, but how can it ensure that the cheap and abundant money thus available is used to purchase assets whose value is rapidly eroding?
The only option then is for the central bank itself to buy the assets. This means that in addition to being the Lender of Last Resort, a central bank also has to be the Market Maker of Last Resort (MMLR). 30. To sum up, the main issues surrounding the role of central banks in financial stability are the following.