Lender of last resort - Financial definition
Concise definition of the term lender of last resort
A lender of last resort is an institution, typically a central bank, that provides emergency funding to financial institutions facing insolvency to prevent systemic collapse.
Comprehensive definition of the term lender of last resort
The concept of a lender of last resort plays a critical role in maintaining financial stability by offering liquidity support to banks or financial entities during crises when no other sources of funding are available. This function is crucial in averting widespread panic and ensuring confidence in the financial system.
For example, during the 2008 financial crisis, the Federal Reserve acted as a lender of last resort by providing substantial loans to struggling banks to prevent a total market collapse. In practical terms, central banks may extend these emergency loans at high interest rates or against collateral, thereby mitigating moral hazard while ensuring that solvent but illiquid institutions can survive short-term disruptions.