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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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References in periodicals archive

Hirsch (1977: 251-252) delineates the two methods that a lender of last resort can curb this moral hazard problem.

Central Bank insolvency: causes, effects and remedies

Moreover, the SMP first, and then the OMT rendered the role of the ECB as a "hidden lender of last resort" more evident and effective, de facto providing for a sterilized monetization of debt.

Assessing the reaction of the EU to the Euro-zone crises

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.

The lender of last resort: a comparative analysis of central banking and fractional reserve free banking

ECB executive board member Peter Praet said it was not the task of the central bank to intervene "when there are fundamental doubts about the sustainability of some countries." Outgoing ECB chief economist Juergen Stark earlier rejected calls for the ECB to act as lender of last resort like the U.S.

Italy moves toward unity cabinet as EU dithers on crisis

But the leaders of Parliament also believed that the absence of a codified authority to act as lender of last resort would not keep the Bank of England from doing so when necessity commanded.

The ECB's battle against central banking

This distinction follows from his Bagehotian view that the lender of last resort should rescue illiquid institutions, as distinct from the modern monetarist view (suggested by Milton Friedman and argued in detail by Marvin Goodfriend and Robert King) that it should instead focus on keeping the broader money stock from shrinking when the public or the banks want to hold more cash.

Central banking in a free society

Saqqaf noted the challenges and difficulties faced by Jordanian Islamic banks, including the absence of the secondary market for Islamic financial instruments, the lack of lender of last resort, lack of qualified and trained personnel on the work of Islamic banks among others.

CBJ to study applying special criteria for Islamic banks

Use of the Federal Reserve as a lender of last resort peaked in October 2008, immediately following the collapse of Lehman Brothers.

The beginnings of normalcy

(Update: Until these conduits are operational, or until February 28, 2009, whichever comes first, the Department will also purchase certain 2007-08 FFELP loans, to minimize disruptions in the interim period--see http://www.ed.gov/news/pressreleases/2008/11/11202008.html.) Meanwhile, the agency has taken the steps necessary to ensure the Lender of Last Resort program is ready, should it be needed.

Student loan access

THINK it's time for the Government to reactivate local authorities to be a lender of last resort to people requiring mortgages to buy houses.

THINK it's time for the Government; Straight to the point

"In light of the changes and developments in today's financial markets, we should take a hard look at whether the Congress has given the Fed the appropriate authority and direction to execute this lender of last resort responsibility when the system is threatened," Paulson said.

Treasury re-make gets Fed's cold shoulder?

Even as a lender of last resort, the central bank has always made sure it had appropriate collateral.

U.S. editorial excerpts -4-