Bagehot's Rule

Bagehot's Rule, originating from the insights of Victorian economist Walter Bagehot, suggests that in times of financial crisis, a central bank should lend freely to banks and financial institutions facing liquidity issues, but only against sound collateral. This approach aims to stabilize the financial system by ensuring that solvent institutions can access the funds they need to survive temporary difficulties, thereby preventing widespread panic and loss of confidence. Essentially, it promotes the idea of providing security for the lending while restoring trust within the financial system during turbulent times.