Question

Central bank is the lender of the last resort. Explain.

Answer 1

1. The 'Central Bank' provides financial help to the commercial banks in times of emergency.
2. Sometimes, a number of depositors may withdraw large sums at the same time and the commercial bank will opt to borrow from other banks to fulfill the needs of the customers.
3. But other banks may not be in a position to help that particular bank on account of some reason.
4. Under such circumstances, the 'Central Bank' either grants loan or purchases the securities of that commercial bank to help it out.
5. Thus, the 'Central Bank' of the country acts as a 'lender of the last resort' for the commercial banks.