Guide to Analysing Companies

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LENDER OF LAST RESORT
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the average maturity of their loans exceeds the average
maturity of their deposits. Should all depositors demand their
money back immediately and simultaneously, there is no bank
that could meet their demands. They could not call in their loans
fast enough. In such a situation the lender of last resort pumps
limitless amounts of money into the system until depositors are
reassured that they will be repaid as and when they wish.
A single central bank may be able to stem a run on a local
bank in a small state such as Hong Kong; indeed, it has hap-
pened more than once there over the years. But in today’s global
market, many doubt whether any single authority in a large
western country would have sufficient resources to act in this
way if called upon to do so. Closing the banks, as happened in
Argentina in 2002 after the country defaulted on its debt to in-
ternational lenders, may solve the problem for a while but
sooner or later the central bank has to find a solution.
Letter of credit
An arrangement with a bank to make money available to a
customer abroad. The customer’s account is debited with the
required amount, and the bank then instructs its relevant cor-
respondent bank to make the money available whenever
the customer wants it. As a security check, the bank will send its
correspondent a copy of the customer’s signature.
Leverage
See gearing.
Leveraged buy-out
The takeover of a company in which most of the cost is paid
for with borrowed money. Usually the assets of the company
being taken over are used as security for the loan (which may
be for up to 70% of the purchase price). The acquiring company