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What is lender of the last …

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What is lender of the last resort?

Posted by Xyz Abcd 7 years, 1 month ago

CBSE > Class 12 > Economics

1 answers

Aayushi . 7 years ago

We know,commercial banks create liabilities (demand deposits)many times more than their cash reseves.This is possible only so long as people have confidence in the banking system of the country.However, there may be occasions when a bank suffers the crisis of confidence.It occurs when the depositors start fearing that the bank may run out its cash reserve.They start withdrawing their deposits beyond what the bank can afford at a time.It is in such a situation that the central bank acts as a lender of the last resort.It offers loans to the commercial banks to cope with the crisis of confidence.

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