AbstractIn this chapter we review the function of the central bank as lender of last resort (LOLR), starting from the understanding of financial crises developed in the previous chapter. We recall long-established LOLR principles: proactive lending, inertia of the central bank risk control framework, and risk endogeneity. Because of its systemic role, a central bank should not tighten its collateral framework in a crisis, as restrictive policies are likely to not only increase the overall damage done by a crisis to society, but to even increase central bank losses. We explain in more detail the main reasons why a central bank should act as LOLR: prevent negative externalities from fire sales; its unique status as institution with unlimited liquidity; its status as a risk-free counterparty making others accept to deliver collateral to it even at high haircuts; and its mandate to preserve price stability. We distinguish three different forms of LOLR: elements built into the regular operational framework; readiness to relax parameters in a crisis; and provision of emergency liquidity assistance to individual firms. We then discuss what could be the optimal propensity of a central bank to engage in LOLR activities and outline possible trade-offs. Last but not least, we develop a bank-run model which highlights the role of asset liquidity and central bank eligible collateral. We calculate through a model variant with binary asset liquidity and uniform central bank collateral haircut, but then also introduce a model variant with continuous asset liquidity and haircuts.