The lender of last resort in the banking system is he

Answer Details

In every country's banking system, there is one institution that serves as the ultimate source of credit for commercial banks and other financial institutions when they cannot obtain funds elsewhere. This institution is the central bank.

The central bank acts as the lender of last resort because it provides emergency loans to commercial banks that are experiencing temporary liquidity shortages. Without this function, a bank facing a sudden surge in withdrawals could collapse, potentially triggering a wider financial crisis. By standing ready to lend, the central bank maintains stability and public confidence in the banking system.

A commercial bank is a profit-making institution that accepts deposits and grants loans to individuals and businesses. An industrial bank (also called a development bank) provides medium- to long-term finance for industrial projects. A mortgage bank specialises in providing loans secured against property. None of these institutions has the authority or the resources to serve as the banking system's backstop lender.

Only the central bank, which controls the money supply and supervises the entire banking sector, has both the mandate and the capacity to fulfil this role.