Financial panics can be a threat to the entire banking system. If one financial institution falls, it can have a domino effect, which generated huge pressures on key financial firms and disrupted many important financial markets. In a financial panic, the central bank can act as the lender of last resort: Central banks provide liquidity (offering short-term loans) to financial institutions that are experiencing financial difficulty or near collapse to help calm financial panics.
In the United States, the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing, and whose failure to obtain credit would dramatically affect the economy. For example, during the 2008 financial crisis, the Federal Reserve, along with U.S. Treasury and FDIC, stepped in to bail out insolvent U.S. financial institutions to minimize systemic risk.
Discussion Topics:
What can cause a financial panic?
What would be the benefits and costs of using the Federal Reserve as a “lender of last resort”?
Share your thoughts.
Watch the Video:
Financial Panic in the Great Depression (1929-1939)
Watch the Video:
The Federal Reserve as Lender of Last Resort
100 word minimum
