Lender of Last Resort - Purpose

Purpose

A lender of last resort serves as a stopgap to protect depositors, prevent widespread panic withdrawal, and otherwise avoid disruption in productive credit to the entire economy caused by the collapse of one or a handful of institutions. Borrowing from the lender of last resort by commercial banks is usually not done except in times of crisis. This is because borrowing from the lender of last resort indicates that the institution in question has taken on too much risk, or that the institution is experiencing financial difficulties (since it is often only possible when the borrower is near collapse).

In the United States the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.

Within other major world economies this role is undertaken by the Bank of England in the United Kingdom (the central bank of the UK), in Switzerland by the Swiss National Bank, in Japan by the Bank of Japan and in Russia by the Central Bank of Russia.

JPMorgan Chase and HSBC are examples of non-central banks that have acted as a lender of last resort on several occasions. J.P. Morgan himself, as an individual, is considered to have played the role of a lender of last resort during the Panic of 1907.