If, as a result, speculation arises that the central bank’s policy judgment might be affected, policy effectiveness could be undermined. Furthermore, losses incurred by the central bank might ultimately lead to taxpayer burden through reduced transfers to the government. The problems that I have just mentioned will be even more acute when safety nets are underdeveloped.
A central bank will be forced to make the decision of whether to dare take risk and exercise its Lender of Last Resort function in order to avoid a crisis despite the possibility of incurring losses.