Cambridge Encyclopedia » Cambridge Encyclopedia Vol. 45

lender of last resort - Origin, Purpose, Retail lending, Criticisms

bank financial panic

An institution, usually a central bank, willing and able to lend to banks unable to borrow money elsewhere to meet their liabilities. The point of having a lender of last resort is to avoid financial collapse during a general financial panic, in which everybody tries to hold cash and refuses to lend. If any bank is in financial trouble, the lender of last resort has to decide whether or not to rescue it. The benefit of assisting any one bank in difficulties is that one default is liable to provoke a general panic. The disadvantage is that if the troubled bank's problems arise through irresponsible lending to risky firms, bailing it out will encourage similar conduct by it and others in the future. This policy dilemma is particularly acute when the problem bank is too large to fail.

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