Question

Why is central bank called as a ‘lender of last resort’ for a commercial bank?

Answer 1

The Central Bank of the country is called the "Lender of the Last Resort" because it provides financial help to commercial banks in times of emergency. Sometimes, the commercial bank may face a liquidity shortage and may not get funds from other banks due to some reason. Under such circumstances, the Central Bank either grants a loan or purchases the securities of that commercial bank to help it out. Thus, the Central Bank of the country acts as lender of the last resort for the commercial banks.