Central Bank Lending to Troubled Commercial Banks
Discuss whether a central bank should lend to commercial banks which get into financial difficulties.
Macroeconomic Factors and Policies
Frequently asked question
- Explanation of the topic
- Brief overview of the arguments for and against central banks being lenders of last resort
II. Arguments for central banks being lenders of last resort (up to ➡️5 marks)
- Function of a central bank as a lender of last resort
- Importance of lending to commercial banks to prevent collapse
- Potential consequences of not lending (loss of money, bank runs, reduced investment, economic decline)
- Importance of commercial banks carrying out their function
III. Arguments against central banks being lenders of last resort (up to ➡️5 marks)
- Potential encouragement of risky behavior by banks
- Perception of being "too big to fail"
- Opportunity cost of using funds for lending to established banks instead of new, expanding ones
- Summary of arguments for and against central banks being lenders of last resort
- Personal opinion on the matter
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