lender of last resort


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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.

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.

‘lender of last resort’

the role of the BANK OF ENGLAND in making funds available to the DISCOUNT HOUSES when they are unable to cover their short-term liabilities from their own resources or from loans from the commercial banks. See DISCOUNT MARKET, INTEREST RATE, CENTRAL BANK.

lender of last resort

the role of the BANK OF ENGLAND in the UK of making money available to the DISCOUNT HOUSES when they are short of funds. When the COMMERCIAL BANKS find themselves with fewer liquid assets than they feel it is commercially prudent for them to hold (that is, when they fall below their RESERVE-ASSET RATIO requirement), then they must improve their liquidity. They can do this either by selling off TREASURY BILLS to the central bank or calling in their short-term loans to the discount houses, which in turn are then forced to borrow from the central bank. To ensure that discount houses turn to the central bank for funds only as a last resort, the central bank generally makes funds available at a higher cost than prevailing market interest rates. This penal rate of interest is presently called the BILL-DISCOUNTING INTEREST RATE (formerly, minimum lending rate). The discount house must offer collateral, such as government bonds, as security for the loan.

The central bank's role as lender of last resort provides a guarantee that adequate liquidity will be provided for commercial banks and thus helps to maintain public confidence in the BANKING SYSTEM. See FRONT DOOR, BACK DOOR.

References in periodicals archive ?
Financial Crises, Contagion, and the Lender of Last Resort.
End the Fed's broken lender of last resort function.
Some have suggested that an international institution such as the International Monetary Fund (IMF) should function as an international lender of last resort (Fischer 1999; Roubini and Setser 2004; Obstfeld 2009).
To assess the desirability of a government central bank acting as a lender of last resort we need to consider the purpose of banking and the credit-granting function that leads to fractional-reserve banking.
Rapid easing of monetary policy and a secure lender of last resort for banks and investment firms could prevent loss of confidence and panic
In the eurozone, there is no lender of last resort.
Or we don't believe in these rules, but in that case we should dismantle the euro We have to have both: an ECB that serves as a lender of last resort for a European federal state' and this state that is capable of imposing discipline on its members and making the financial transfers that are part of its role.
Topics include unstable banking, endogenous exposure to systemic liquidity risks, financial complexity and risk, from microprudential to macroprudential regulation, and liquidity regulation and the lender of last resort policy.
Ex-Im Bank currently has more business in its pipeline than it can support given the current cap limitations a Congress acts soon, exporters could see their lender of last resort falter as it waits for the new reauthorization
The European Central Bank will not act as lender of last resort for struggling eurozone countries, its chief Mario Draghi insisted, but left the door open to other measures if governments agree on budgetary consolidation.
The markets hope that the German government is just negotiating by blocking any move to transform the European Central Bank into a lender of last resort.
France and Germany disagree about whether the ECB should act as lender of last resort and whether bonds should be issued by the whole of the eurozone instead of individual countries.