The bank which acts as the lender of last resort is the?
Answer Details
The bank that acts as the lender of last resort is the central bank.
The central bank is a government institution that is responsible for implementing monetary policy and regulating the country's financial system. One of the critical functions of the central bank is to act as the lender of last resort, which means it provides emergency funding to commercial banks when they cannot obtain funds from other sources.
In times of financial crisis, commercial banks may experience a shortage of liquidity and struggle to meet the withdrawal demands of their depositors. If left unchecked, this situation can lead to bank runs and even the collapse of the banking system. To prevent such a scenario, the central bank steps in and lends money to the commercial banks, usually at a high-interest rate.
The lender of last resort function is an essential tool that central banks use to maintain financial stability and prevent systemic risks to the economy. By acting as the ultimate source of liquidity, the central bank helps to instill confidence in the banking system and prevent the contagion of financial crises.