Since the 1930s, following banking crises, if financial institutions are not able to borrow in private credit markets:
A)the Federal Reserve takes a laissez-faire attitude, allowing market forces to determine which institutions will survive.
B)the Federal Reserve may act as a lender of last resort.
C)the U.S. Treasury may make short-term loans to them.
D)they are not allowed to engage in maturity transformation until their financial condition improves.

Question

Quizplus · Accepted Answer

Following banking crises, if financial institutions are not able to borrow in private credit markets, the Federal Reserve may act as a lender of last resort. This means that the Fed lends funds to banks that are experiencing financial difficulties and can't find other sources for loans. This is done to stabilize the financial system and prevent a collapse of the banking system. This is a well-established practice and has been used in various financial crises throughout history, including the Great Depression and the Global Financial Crisis of 2008.

Since the 1930s, Following Banking Crises, If Financial Institutions Are