Lender of last resort

Lender of last resort

Traditionally the Federal Reserve Bank in the US, which assists banks that face large withdrawals of funds and in so doing stabilizes the banking system.

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Lender of Last Resort

An agency — usually a central bank — guaranteeing loans and extending credit when an institution is no longer creditworthy. The term especially applies to a country's central bank lending to other banks when they have become or are becoming insolvent. This is done to prevent bank runs and stabilize the wider economy. At the international level, the International Monetary Fund acts as a lender of last resort to sovereign states that are facing insolvency. In the Free Banking Era, private banks or even very wealthy individuals operated as lenders of last resort.

The term can also apply to private institutions that specialize in extending credit to very high-risk customers. These institutions charge a high rate of interest and only appeal to persons and organizations that are not otherwise creditworthy. See also: Federal Reserve System.