Lender of Last Resort

Lender of Last Resort

A lender of last resort is, as the name implies, a lender that will offer credit to institutions when they cannot find it anywhere else. The most common lender of last resort is the Central Bank, the Federal Reserve in the USA.

Usually, access to the lender of last resort is only granted to firms who, if they failed to receive credit, would create massive damage to the economy and hence are seen as "too big to fail". The central banks offer this service for two reasons:

  • Prevent the firm collapsing and causing major damage to the economy
  • Protect individuals who have savings or other forms of cash invested in the firm

One of the main criticisms aimed at the idea of a lender of last resort is that it acts as a safety net, thereby encouraging firms with access to the lender to take more risky action than they would otherwise have done.

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