Correct Option
The correct option is 2 only.
Explanation
The function of the central bank as the ‘lender of last resort’ refers to its role in providing emergency liquidity to financial institutions to prevent systemic instability. This function is central to maintaining confidence in the banking system.
Statement-wise Analysis
Statement 1: Incorrect.
The lender of last resort function does not involve direct lending to trade and industry bodies. The central bank primarily extends such emergency support to scheduled banks and financial institutions facing liquidity stress, not to private industry.
Statement 2: Correct.
The central bank provides short-term liquidity to banks facing temporary financial crises, typically against approved securities. This ensures stability in the banking system and prevents bank failures due to short-term liquidity mismatches.
Statement 3: Incorrect.
Lending to the government to finance budgetary deficits is related to public debt management or deficit financing and is distinct from the lender of last resort function, which is concerned with financial stability in the banking sector.
Key Takeaway:
The lender of last resort function specifically refers to the central bank’s role in providing emergency liquidity to banks facing temporary financial stress to preserve systemic stability.