lender of last resort
A central bank's role to provide emergency loans to financial institutions facing insolvency crises to prevent systemic banking collapses.
Example
“During the 2008 crisis, the Fed acted as lender of last resort, providing emergency loans to banks facing runs.”
Memory Tip
LENDER OF LAST RESORT = the Fed steps in when no one else will. Prevents banking collapses.
Why It Matters
Understanding the lender of last resort function helps you recognize how central banks protect the financial system during crises, which affects the stability of banks where you keep your savings and the overall economy that influences your job security and investment returns.
Common Misconception
Many people believe that lender of last resort means the central bank will bail out individual depositors or investors who make poor financial decisions, when in reality it only provides emergency liquidity to institutions to prevent system-wide collapse.
In Practice
During the 2008 financial crisis, the Federal Reserve lent hundreds of billions of dollars to major banks like JPMorgan Chase and Bank of America through emergency facilities, preventing these institutions from failing and triggering a complete banking system collapse that would have devastated millions of customers and the broader economy.
Etymology
LENDER (one who loans) OF LAST (final, when all else fails) RESORT (an option to turn to). The LAST option when no one else will LEND.
Common Misspellings
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