Question

Explain the 'lender of last resort' function of the central bank.

Answer 1

When commercial bank exhausts all resources to supplement their funds at the time of liquidity crisis, the Central Bank acts as the lender of the last resort to them. When commercial banks cannot meet the obligations of their depositors, the Central Bank comes to their help. The Central Bank advances credit against eligible securities subject to certain terms and conditions. This saves the commercial banks from a possible breakdown. This is an important function of the Central Bank in the banking system of a country.