The lender of last resort function is important for financial stability from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
The lender of last resort function plays a crucial role in maintaining financial stability. This function is important because it helps prevent bank runs and financial panics, which can have devastating effects on the economy. By providing emergency liquidity to banks that are experiencing a sudden withdrawal of funds, the lender of last resort can help stabilize the financial system and prevent a domino effect of bank failures.
During times of crisis, when depositors lose confidence in the banking system and rush to withdraw their funds, banks may not have enough liquid assets on hand to meet these demands. This can lead to a liquidity crisis, where banks are forced to sell off assets at fire-sale prices or even declare bankruptcy. The lender of last resort steps in to provide emergency funding to banks facing these liquidity shor...
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