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Lender of Last Resort
       
 
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Lender of Last Resort

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Lender of Last Resort
An Institution, usually a country's Central Bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.
    
In the U.S. the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing and whose failure to obtain credit would dramatically affect the economy.
    
The lender of last resort functions both to protect individuals who have deposited funds, and to prevent panic withdrawing from banks who have temporary limited Liquidity. Commercial banks usually try not to borrow from the lender of last resort because such action indicates that the bank is experiencing financial crisis.
    
Critics of the lender-of-last-resort methodology suspect that the safety it provides inadvertently tempts qualifying institutions to acquire more Risk than necessary - since they are more likely to perceive the potential consequences of risky actions to be less severe.
    
The Federal Reserve, as the nation's Central Bank, has the authority and financial resources to act as "lender of last resort" by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency; particularly where failure to obtain credit would have a severe adverse impact on the economy.
Posted by  Opal Financial Group, Institute for International Research
 
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