A lender of last resort (LoR) is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In the United States, the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing, and whose failure to obtain credit would dramatically affect the economy. [Source]

The lender of last resort functions to protect individuals who have deposited funds—and to prevent customers from withdrawing out of panic from banks with temporarily limited liquidity.

Eliminating or limiting the lender of last resort function of the Fed increases the risk of bank failures and “bank runs”, where large numbers of customers withdraw their money simultaneously, potentially collapsing otherwise solvent situations. The Fed acts as a stabilizing force during crises by injecting liquidity into the system. If this function is eliminated, distress at one bank or in one part of the financial system could spread more easily, potentially triggering a broader financial panic. This could lead to systemic crises similar to the Great Depression or the 2008 financial crisis.

Full contextual analysis of Section 4.4: Federal Reserve here.