What is a lender of last resort? The central bank's emergency role
By SendPay Business · · 2 min read
A lender of last resort is an institution, usually a country's central bank, that lends money to banks when nobody else will. Its job is to stop a bank that is short of cash from collapsing, and to stop that panic spreading to other banks.
Why it is needed
Banks lend out most of the money customers deposit, so they never hold enough cash to repay everyone at once. If depositors panic and rush to withdraw, even a healthy bank can run out of cash. A lender of last resort fills that gap so the bank can keep paying out.
The classic rule
In the 1870s the writer Walter Bagehot argued that in a panic a central bank should lend freely, to solid banks, against good collateral, at a high interest rate. Central banks still refer to this idea today, though they apply it in different ways.
The worries
- Moral hazard: banks may take more risk if they expect to be rescued.
- Telling the difference between a bank short of cash and a bank that is actually broke is hard in a crisis.
- Emergency lending can put public money at risk.
Where SendPay fits
SendPay isn't a bank. SendPay platforms give your customers GBP, EUR and USD accounts, transfers and branded Visa cards under your own brand, powered by licensed partners. SendPay doesn't offer lending.
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Build my platform →Questions people ask
How much of its deposits could a bank pay out?
Work out liquidity and loan-to-deposit ratios.
Bank liquidity calculator →What is fractional reserve banking?
Banks keeping only part of deposits as cash and lending out the rest.
Fractional reserve banking →What is a central bank base rate?
The interest rate a central bank sets, which shapes other rates.
Base rates →Read next
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.