Posted by: Dirk | December 11, 2014

Can a central bank lend money to firms, individuals or households?

Or, put differently, can firms, individuals or households borrow from the central bank? The answer for modern central banks is: no. Here is an excerpt from “the Statute“:



Article 17

Accounts with the ECB and the national central banks
In order to conduct their operations, the ECB and the national central banks may open accounts for credit institutions, public entities and other market participants and accept assets, including book entry securities, as collateral.

This means that firms, individuals and households cannot borrow directly from the ECB because they do not have accounts at the ECB. I am not a legal expert, but the Swabian housewife does not really fall into the category “other market participants”, so I doubt that this “logic” would give any discretion to the ECB when it comes to creating accounts at the central bank.

Financial firms, by the way, say the same thing. The central bank cannot lend reserves to the private sector, and also banks cannot lend reserves to the private sector. Banks cannot “lend out” reserves, as Nomura notes in 2011. Two years later, Standard&Poor’s has a report out titled: Repeat After Me: Banks Cannot and Do Not “Lend out” Reserve. Academic economists like Randall Wray knows that reserves cannot be “lent out”, and that economists knew that for many decades! The Bank of England knows it, too: “A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.”

So, it is about time to replace the money multiplier of macroeconomics textbooks



… with a better description of how money and credit work.



  1. You are right, mainstream economists assume strange behaviour when they say “bank lend out reserves” but it is a slightly different matter when you are talking of central bank lending to non-banks.

    A non-bank needn’t have an account at the central bank for the central bank to be a lender. If you find out the huge rescue operations done by the Federal Reserve, you will find that it was lending to hedge funds etc.

    For example suppose a Hedge Fund wants to borrow funds from the central bank under some emergency rescue facility. Lets say $100 and the HF banks at Citibank. The central bank will take collateral and send a Fedwire request and the Hedge Fund’s Citibank bank account will rise by $100 and Citibank’s account at the Fed will rise by $100.

    • You are right. I wrote non-banks, but meant non-financial firms. However, the Fed has rules which it only breaks in times of crisis, and even then not without dictating the terms. The investment banks had to turn into bank holding companies in order to have access to the Fed in 2008.

      • Yes but there were many financial firms who didn’t turn into bank holding companies.

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