What does it mean for a central bank to be the lender of last resort?

The concept of a central bank acting as the lender of last resort is fundamentally about the role it plays in ensuring financial stability, particularly during times of liquidity crises or market stress. When financial institutions face sudden demands for cash and cannot obtain it from other sources, the central bank steps in to provide the necessary liquidity. This support is crucial because it helps prevent the panic and loss of confidence that can arise in financial markets when banks or other key institutions are at risk of failing due to temporary cash shortages.

By providing liquidity in these critical times, the central bank helps to stabilize the banking system and maintain trust in the financial infrastructure. This function is essential to safeguarding the economy, as it allows financial institutions to meet withdrawal demands from customers and fulfill their short-term obligations, thereby reducing the risk of a wider financial crisis.

The other options focus on different aspects of a central bank's operation. Controlling interest rates relates to its monetary policy role, maintaining currency reserves pertains to ensuring that a country can meet its international obligations, and preventing commercial bankruptcies is generally outside the scope of a central bank's direct responsibilities. Thus, the correct understanding aligns closely with the role of the lender of last resort, emphasizing the provision of liquidity during periods of stress.