QS Study

“Central Bank is the Lender of the Last Resort”

The Central bank is the guardian of the money market. To build a powerful and sound banking system central bank takes all necessary steps. For this purpose central bank works together with other commercial banks and government. A central bank offers an extension of credit to financial institutions experiencing financial difficulties which are unable to obtain necessary funds elsewhere. Central banks have to provide loan and advances at the time of crisis for commercial banks and for the government. To stable, the value of currency central bank controls the circulation of credit. Because excess inflow of credit creates inflation and poor inflow creates money crisis. These two situations are harmful to the economic environment.

Commercial banks would be face money crisis or any other economic crisis at any time. As a result, an operation of those banks will be collapsed. In this case, if a commercial bank fails to create a fund, the central bank provides loan and escape those vulnerable banks from being closed. The Central bank provides loan directly and by buying and selling of bond, security etc. it provides a fund for commercial banks.

The Central bank buys bond, securities etc. and gives cheques to the seller. The seller deposits those cheques in their own account. Then commercial banks deposit that money and thus economic crisis is reduced.

Finally, we can say when commercial banks fall in economic crisis and cannot fund money from any source, central bank then provides loan as the lender of the last resort. That’s why Prof. Hawtrey said, “Central bank is the lender of the last resort.”

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