What is the definition of "lender of last resort"?

The concept of "lender of last resort" refers to a role typically played by a central bank, which provides liquidity to financial institutions or markets that are experiencing difficulties, especially during times of financial crises. This function is critical in maintaining stability within the financial system, as it helps to prevent bank runs and allows otherwise solvent banks to continue operating by providing them with the necessary funds when private lenders are unwilling or unable to do so.

The central bank's ability to act as a lender of last resort is essential in assuring market participants that there will be available funding during stressful periods, thus preserving confidence in the financial system. By acting in this capacity, the central bank can help stabilize the economy and mitigate the impact of financial disruptions.