Lender of Last Resort

A lender of last resort is a central bank that provides emergency loans to commercial banks or other large financial institutions facing imminent collapse or bankruptcy. These loans are typically extended to institutions deemed “ too big to fail,” whose failure would likely cause severe economic consequences. In the U.S., the Federal Reserve acts as the lender of last resort for institutions that have exhausted all other borrowing options. However, this role is often criticized for creating a moral hazard, where banks might be encouraged to engage in risky behavior, knowing that they can rely on the central bank for bailouts in times of crisis. Learn more about the banking system