Skip to content

IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

Which action is the classic role of a central bank as lender of last resort?

As lender of last resort, the central bank gives emergency liquidity, usually against good collateral, to a solvent bank that is temporarily short of cash during a run or market stress. This prevents contagion; it is not an open-ended rescue of insolvent institutions.

  1. AProviding emergency liquidity to a solvent but illiquid bank facing a run, against good collateralCorrect
  2. BGuaranteeing that every insolvent bank will be kept open indefinitely
  3. CSetting the tax rates paid by commercial banks
  4. DDirectly choosing which firms receive bank loans in normal times
  5. Buying all government shares in the banking sector

Explanation

The lender of last resort role is to stop liquidity problems turning into systemic crises by lending to basically sound banks that cannot raise funds in the market, typically against collateral. It is not a guarantee for insolvent banks nor a tool for allocating credit or setting taxes.

Did you get it right without looking?

One question tells you little. A timed set on Role, structure and stability of the financial system shows your real accuracy, how long you take and where you lose marks.

Practise Role, structure and stability of the financial systemFree diagnostic mock

More Role, structure and stability of the financial system questions