lender of last resort theory

The lender of last resort theory refers to a central bank’s role in providing emergency financial support to banks or financial institutions facing severe liquidity shortages. When a bank cannot meet its obligations and is at risk of failure, the central bank steps in with short-term loans to stabilize the institution and prevent wider financial instability. This function helps maintain confidence in the banking system, curbing panic and preventing crises from spreading, by acting as a safety net during times of financial distress.