A central bank can destroy its own lender-of-last-resort capacity by bailing out one bank

Evidence

By 2008, the Icelandic central bank found itself running out of liquidity when Glitnir, which had been struggling to refinance itself since the beginning of the year, found it couldn’t access funding markets. The central bank offered it a loan equivalent to 25 percent of its reserves in exchange for 75 percent ownership, a de facto nationalization, which rather shocked the markets into action. The fallout from Glitnir immediately hit the other banks’ funding sources such that private interbank credit was shut off as depositors withdrew their money. Meanwhile, the central bank was in no position to continue to act as a lender of last resort having already given away huge chunks of its reserves. — Mark Blyth, Austerity, 641