Lender of last resort

Updated: Aug 20, 2021

Within the financial structure of any economy there are many institutions prepared to lend money. In order to lend, these institutions must first borrow, and those from whom they borrow must themselves have sources of funds on which to draw. There must then obviously be a lender who can, in the last resort, create or originate funds. This role is usually played by the central bank – in the U.K., the Bank of England and this central bank is often referred to as the lender of last resort. It must always make money resort. It must always make money U.K. such money is provided through the discount houses, either by repurchasing treasury bills or lending on other paper assets or, when amounts required are larger, by direct loans to the discount houses. In exercising this ultimate responsibility it will charge such interest rates as it judges sufficiently high to discourage borrowing, rates which will most certainly be in excess of those at which the borrowing houses are able to lend.

The particular rate charged by the Bank of England was, until recently, known as the bank rate. It then became known as minimum lending rate and afterwards as Bank of England base rate, which is as Bank of England base rate, which minimum lending rate must, by its very nature, be the highest of the current market interest rates for no-risk lending of money. it tends to influence all other interest rates in the country and an increase or fall in M.L.R. will usually cause proportionate changes in other rates of interest. Because market prices of securities are governed by interest rates such prices will necessarily and promptly respond to changes in those rates.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.