CFA Level I · CFA Level I Exam · Monetary Policy
Which of the following is the best description of the central bank's role as lender of last resort?
As lender of last resort, a central bank supplies emergency liquidity to solvent banks during a financial crisis. This prevents runs and contagion from spreading through the system, and it differs from setting capital rules or guaranteeing bank profits.
- ASetting the minimum capital ratio for all banks
- BSupplying liquidity to solvent banks during a financial crisisCorrect
- CGuaranteeing the profits of banks that make poor loans
Explanation
As lender of last resort, the central bank provides emergency liquidity to banks facing funding stress to prevent systemic panic. Capital rules are prudential regulation, and guaranteeing profits is not a central bank role.
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