Question

Central bank is the lender of the last resort. Explain.

The Central Bank is the apex monetary institution of the country. Explain its role of a lender of the last resort. 

Why is the central bank considered to be the lender of last resort?

How will you prove that Central Bank is the lender of the last resort?

To whom does the phrase “Lender of the last resort” refer? Justify your answer.

What do you understand by lender of last resort?

Answer 1

1. As a banker to the banks, the central bank acts as the lender of the last resort. In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach the central bank for loans and advances.
2. Thus, it saves banks from possible failure and banking system from a possible breakdown.

Answer 2

• The central bank also acts as a lender of last resort. De Kocks regards this function as sine qua non (an absolutely essential function) of central banking in view of its being the custodian of cash reserves of commercial banks.
• When commercial banks have exhausted their resources and are in need of funds, they approach the central banks as a last resort in distress to tide them over their financial crises. In its capacity as the lender of last resort, the central bank provides, directly or indirectly, all reasonable financial assistance to the commercial banks, discount houses, bill brokers, and other financial institutions.
• The central bank supports such institutions during times of financial stress through the discounting of approved securities, collateralized loans, and advances. The central bank, thus, by providing temporary financial accommodation, saves the country's financial structure from collapse.