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. Foam The Runway

    A term indicating the last-minute infusion of cash into a company ...
  3. Bank

    A financial institution licensed as a receiver of deposits. There ...
  4. Bank Run

    A situation that occurs when a large number of bank or other ...
  5. Central Bank

    The entity responsible for overseeing the monetary system for ...
  6. Liquidity

    1. The degree to which an asset or security can be bought or ...
Related Articles
  1. How The Federal Reserve Manages Money ...
    Personal Finance

    How The Federal Reserve Manages Money ...

  2. What Are Central Banks?
    Personal Finance

    What Are Central Banks?

  3. Why do companies issue debt and bonds? ...
    Investing

    Why do companies issue debt and bonds? ...

  4. Successful Ways That Governments Reduce ...
    Economics

    Successful Ways That Governments Reduce ...

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center