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What does the term “Lender of the last resort” refer to?

  By GK Planet Team      
Q. What does the term “Lender of the last resort” refer to?
  1. Function of commercial banks in which they provide a guarantee to all depositors assuring them of the safety of their money.
  2. Function of the monetary authority in which it provides guarantee of solvency to low risk corporates.
  3. Function of the government in which it provides guarantee of subsidy of electricity and water to farmers.
  4. Function of the monetary authority in which it provides guarantee of solvency to commercial banks in case of a bank run.
Answer: Function of the monetary authority in which it provides guarantee of solvency to commercial banks in case of a bank run.

A lender of last resort (LoR) is an institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In India, the Reserve Bank acts as the lender of last resort to institutions that do not have any other means of borrowing, and whose failure to obtain credit would dramatically affect the economy.

When commercial banks fail to meet their financial requirements from other sources, they approach the central bank, which gives loans and advances as lender of the last resort. If commercial banks have insufficient reserves to meet any financial obligation, then in order to avoid financial panic, there must be a guarantee that banks can get cash if they really need it.
Central Bank Is the only institution that performs the role of lender of last resort.
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