Lender Of Last Resort

AAA

DEFINITION of 'Lender Of Last Resort'

An institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In the U.S. the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing and whose failure to obtain credit would dramatically affect the economy.

INVESTOPEDIA EXPLAINS 'Lender Of Last Resort'

The lender of last resort functions both to protect individuals who have deposited funds, and to prevent panic withdrawing from banks who have temporary limited liquidity. Commercial banks usually try not to borrow from the lender of last resort because such action indicates that the bank is experiencing financial crisis.

Critics of the lender-of-last-resort methodology suspect that the safety it provides inadvertently tempts qualifying institutions to acquire more risk than necessary - since they are more likely to perceive the potential consequences of risky actions to be less severe.

RELATED TERMS
  1. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. Central Bank

    The entity responsible for overseeing the monetary system for ...
  3. Bank Run

    A situation that occurs when a large number of bank or other ...
  4. Liquidity

    1. The degree to which an asset or security can be bought or ...
  5. Bank

    A financial institution licensed as a receiver of deposits. There ...
  6. Panic Selling

    Wide-scale selling of an investment, causing a sharp decline ...
RELATED FAQS
  1. Why do companies issue debt and bonds? Can't they just borrow from the bank?

    Companies issue bonds to finance operations. Most companies can borrow from banks, but view direct borrowing from a bank ... Read Full Answer >>
Related Articles
  1. Personal Finance

    How The Federal Reserve Manages Money Supply

    Find out how the Fed manages bank reserves and this contributes to a stable economy.
  2. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  3. Economics

    What's The Impact On Equities If The Rates Hike?

    The Fed is on course for raising interest rates. True, that leaves the question of when (most likely June or September, but could be later) and how much.
  4. Investing

    Are You Ready To Invest In The Tech Sector?

    Tech stocks, particularly those of mature tech companies, are well positioned and offer meaningful upside potential in the near-term.
  5. Investing

    The Impact Of A Stronger Dollar In The Markets

    The economy continues to improve, but also demonstrated that some areas of the stock market are more vulnerable to an increase in interest rates.
  6. Bonds & Fixed Income

    Does Quantitative Easing Work?

    The US, Japan, and now the EU have embraced quantitative easing. But what works for the economy of one country doesn't necessarily work for another's.
  7. Trading Strategies

    Consider The Season On Trading Day

    Calendar and clock bias, better known as seasonality, is a frequently misunderstood concept that exerts a huge influence on the ticker tape.
  8. Investing

    Reassessing Your Approach To Bond Investing

    Rethinking your fixed-income portfolio may not resonate in quite the same way as dropping 10 pounds or finally giving up that smoking habit.
  9. Economics

    Sanctions & Falling Oil Prices Hit Ruble Hard

    Russia, through its aggressive actions, has brought upon itself sanctions which, coupled with falling oil prices, have adversely impacted its economy.
  10. Economics

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.

You May Also Like

Hot Definitions
  1. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  3. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  4. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center