LENDER OF LAST RESORT

The Lender of Last Resort (LLR) is a function played by the central bank in extreme cases, such as crises, bankrupts and panics.

In Europe this role is played by the EUROPEAN CENTRAL BANK - ECB. In the USA it is played by the Federal Reserve BankFEDERAL RESERVE SYSTEM (Encyclopedia) (e.g. Troubled Asset Relief Program (TARP)).

The central bank lends to troubled banks and/or financial institutions in order to restore market's confidence and stabilise interest rates. Amounts lended are relevant, and not previuosly announced.

The LLR function gives raise to certain doses of MORAL HAZARD (Encyclopedia), and for this reason is rarely employed.