Question

Why is the central bank referred to as the lender of last resort?

• A. It saves commercial banks from possible failure
• B. It maintains cash reserves
• C. It acts as the clearing house for banks
• D. It expands and regulates the commercial banks

Answer 1

The correct option is A

It saves commercial banks from possible failure

The central bank is referred to as the lender of last resort as it saves banks from possible failure and the banking system from a possible breakdown. In case commercial banks fail to meet their financial requirements from other sources, they can approach the central bank for a loan as a last resort.