A lender of last resort is an institution willing to extend credit when no one else will. The term generally refers to a reserve financial institution (most often the central bank of a country) that secures well-connected banks and other institutions that are "too big to fail" against bankruptcy.
Due to fractional reserve banking, in aggregate, all lenders and borrowers are insolvent. A lender of last resort serves as a stopgap to protect depositors, prevent widespread panic withdrawal, and otherwise avoid disruption in productive credit to the entire economy caused by the collapse of one or a handful of institutions.
How Does The Federal Reserve Control The Monetary System?
In the United States the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere, and Federal Reserve interest rates set the national standard for flow of credit. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.
A lender of last resort contributes to the temptation for an institution to take on more risk. A lender of last resort provides a safety net to insulate the institution from the full consequences of their risk. The lender does not underwrite the consequences but could hide imminent business failure by the extension of credit. This type of system is wrought with moral hazards because it takes away economic consequences of bad decisions and allows the practice of fractional reserve lending to exist without the consequences associated with its existence.
Another major point is that the credit extended to these failing institutions by the Federal Reserve is new money that is created out of thin air from the Federal Reserve. In it's clearest understanding, it is stealing the value of the money printed prior to create new credit based on nonexistent deposits. There is no need for this if we had sound full reserve banking.