This paper aims at explaining why central banks provide lending of last resort services to individual commercial banks. We argue that LOLR transactions are motivated by the macroeconomic objective of stabilizing the economy. By providing LOLR transactions the central bank lowers the proba- bility that banks go bankrupt, reduces uncertainty on the money multiplier and thus lowers inflation and output variance. The model also explains why central banks tend to support only large banks and the eects of possible moral hazard behavior in consequence of LOLR guarantees. Interestingly enough, moral hazard contributes to a higher degree of macroeconomic stability but also higher stabilization costs.