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Question
Give reason or explain the following statement:
Central Bank acts as a lender of the last resort.
Solution
Central Bank acts as a lender of the last resort.
Central Bank acts as a lender of the last resort.
Prof. Hawtrey defines, "Central Bank is that which is the lender of the last resort."
Central Bank is the apex or the supreme monetary and banking authority and occupies a pivotal position in the monetary and banking structure of the country. It is the undisputed leader of the money market.
The commercial banks operate on the basis of low cash reserve system. If there is a great demand for cash by the depositors, even a well managed commercial bank can run into difficulty. This is because, with low cash reserves, it will not be able to meet a sudden and large demand for cash. The Central Bank comes to their rescue at such times. It is the ultimate source of financial assistance to commercial banks. Just as people go to commercial banks when they want loans, commercial banks go to the Central Bank of the country in times of their financial difficulties. Thus, `the lender of the last resort' function of the Central
Bank helps to control panic and infuses confidence among the banks as well as the public. Hence, during the financial difficulties or crisis, commercial banks can always depend upon the Central Bank for the required assistance.
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