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

Which of the following describes the central bank's role as 'lender of last resort'?

As lender of last resort, the central bank provides emergency liquidity to banks, typically solvent ones, that cannot borrow elsewhere. This prevents liquidity problems and runs from spreading and threatening the stability of the financial system.

  1. AProviding emergency liquidity to solvent banks facing a shortage of funds that they cannot obtain elsewhereCorrect
  2. BGuaranteeing the profits of all commercial banks
  3. CSetting the prices of loans offered by all private lenders
  4. DLending directly to households at subsidised rates
  5. Issuing shares in commercial banks to raise capital for the government

Explanation

The lender of last resort supplies liquidity to banks that cannot raise funds in the market, helping to prevent bank runs spreading through the system. It does not guarantee profits or fix private lending prices.

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