AP MacroeconomicsMoney & Monetary Policy
Lender of Last Resort
A lender of last resort is a central bank that supplies emergency liquidity to solvent banks during a panic to stop bank runs from spreading.
When a bank cannot borrow in normal markets during a crisis, the central bank (the Fed, via the discount window) lends to it to prevent a liquidity shortage from triggering broader failures. The goal is financial stability — halting contagion — not bailing out insolvent firms. This function complements deposit insurance in preventing bank panics.