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 ?
In most countries, the role of lender of last resort has traditionally been played by the central bank.
Lindsey: I think we would be living in a much better world if we had that kind of international lender of last resort.
The panics ceased after 1866 when the Bank of England learned to act as a proper lender of last resort.
With banks and insurance companies still tight-fisted on real estate lending, particularly for commercial and multi-family residential properties, the equity REIT has become a lender of last resort," Karr added.
The association has asked the bank to 'give definitive terms of how the lender of last resort will function'.
Remember when the Rock went to the Bank of England to ask for its legitimate support as the lender of last resort - only for the news to be leaked to the BBC?
Northern Rock normally relies on the wholesale markets for 75 per cent of its funding, and it was forced to turn to the Bank of England as lender of last resort when these markets dried up.
75bn classified as "other assets" - a category that is likely to include the bank's support as lender of last resort to Northern Rock.
that it is impossible for restrictive measures to slow down the boom at the optimal rate without precipitating collapse, the lender of last resort faces dilemmas of amount and timing.
Then, the BOJ said in a statement, ''The Bank of Japan is determined to continue its utmost efforts as a central bank by providing ample liquidity to the market and preventing systemic risk from materializing as the lender of last resort.
The virtual halt of real estate financing by lenders is blamed for turning the city into a lender of last resort for owners who have no other place to turn.
The Federal Reserve Banks fulfill important functions in providing adjustment credit and acting as a lender of last resort for depository institutions.