Lender of last resort,
Definition of Lender of last resort:
A lender of last resort (LoR) is an institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In the United States, the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing, and whose failure to obtain credit would dramatically affect the economy.
Central bank of a country that has the authority and financial resources to act as the ultimate source of credit. In emergencies (such as a run on banks), it extends loans to solvent but illiquid depository institutions whose failure to obtain credit would have a destabilizing effect on the national or regional economy. Central banks have their governments backing to make such loans for retaining the publics confidence in the countrys financial system. When central banks themselves get into difficulties, the IMF may act as a lender of last resort.
The lender of last resort functions to protect individuals who have deposited funds—and to prevent customers from withdrawing out of panic from banks with temporary limited liquidity. Commercial banks usually try not to borrow from the lender of last resort because such action indicates that the bank is experiencing a financial crisis.
How to use Lender of last resort in a sentence?
- A lender of last resort provides emergency credit to financial institutions that are struggling financially and near collapse.
- Some argue that having a lender of last resort encourages moral hazard: that banks can take excessive risks knowing that they will be bailed out.
- The Federal Reserve, or other central bank, typically acts as the lender of last resort to banks that no longer have other available means of borrowing, and whose failure to obtain credit would dramatically affect the economy.
Meaning of Lender of last resort & Lender of last resort Definition