Question

Describe a central bank’s role as lender of last resort during a financial crisis.

Answer 1

The central bank is named the lender of the last resort because banks can approach the central bank for borrowing money when they cannot do so from any other source. A bank can face a liquidity crisis or a lack of capital because of which it may fail to meet its customer's liquidity demand. In such a case, a bank might have to borrow funds. When a bank cannot borrow from other sources, the central bank is the last resort from which it can borrow funds to meet its requirements.