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Explain the 'Lender of Last Resort' Function of Central Bank. - Economics

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Short Note

Answer the following question.
Explain the 'lender of last resort' function of central bank.

Answer the following question.
State the role played by the central bank as the "lender of last resort".

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Solution 1

A Central Bank is the apex bank which controls the entire banking system of a country. It has the sole authority to issue notes in that country. It also acts as a banker to the government and controls the supply of money in the country.

The Central Bank provides financial assistance to commercial banks by rediscounting eligible bills of exchange. When commercial banks do not get loan facilities from any other sources, they approach the Central Bank as a last resort. The Central Bank advances loans to such banks against approved securities. Thus, the Central Bank acts as a ‘lender of the last resort’.

Solution 2

As the lender of last resort, the central bank is under the obligation to provide funds against securities to the commercial bank as and when needed by them. When a commercial bank faces a financial crisis and fails to obtain funds from other sources, then the central bank plays the vital role of ‘lender of last resort’ and provides them with financial assistance in the form of credit. This role of the central bank saves the commercial bank from being bankrupt. Thus, the central bank plays the role of guarantor for the commercial banks and maintains a sound and healthy banking system in the economy.

Concept: Central Bank Function - Banker's Bank
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