The International Lender of Last Resort: How Large is Large Enought?

IMF Working Papers, May 1, 2001

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The International Lender of Last Resort: How Large is Large Enought?

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Bibliographic details

• Authors: Olivier D Jeanne
• Published: May 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451849875.001

Summary

• The paper considers how an international lender of last resort (LOLR) can prevent self-fulfilling banking and currency crises in emerging economies.
• It compares two different arrangements:
  • An international LOLR that injects liquidity into international financial markets.
  • An international LOLR whose resources back domestic banking safety nets.
• Both arrangements would require important changes in the global financial architecture:
  • The first arrangement would require a global central bank issuing an international currency.
  • The second arrangement would have to be operated by an "international banking fund" closely involved in the supervision of domestic banking systems.

Key findings and analysis

• The international LOLR can address self-fulfilling banking and currency crises in emerging economies by providing liquidity support.
• Two distinct operational modalities are evaluated:
  • Liquidity provision at the international financial market level (requiring an international currency issuer).
  • Backstopping domestic banking safety nets (requiring close supervisory involvement by an international banking fund).
• The comparison highlights trade-offs between centralized international liquidity provision and decentralized support tied to domestic banking supervision.

Policy implications and recommendations

• Significant institutional changes in the global financial architecture are necessary to implement an effective international LOLR.
• For the liquidity-international-markets arrangement:
  • Creation of a global central bank capable of issuing an international currency is necessary.
• For the domestic banking-safety-net arrangement:
  • Establishment of an "international banking fund" that is closely involved in domestic banking supervision is necessary.
• The choice between arrangements involves considerations of sovereignty, supervisory capacity, and the design of safety nets to prevent bank runs and currency mismatches.

Subject areas and keywords

• Subject: Bank solvency, Banking, Currencies, Currency mismatches, Exchange rates, Financial crises, Financial sector policy and analysis, Foreign exchange, Lender of last resort, Money
• Keywords: Asian crisis, bank assets, bank collapse, bank run, bank runs, Bank solvency, bank's depositor, banking sector, banks' assets, central bank, credit crunch, Currencies, currency depreciation, Currency mismatches, currency risk, deposit insurance, discount window, dollarization, domestic bank, exchange rate regime, Exchange rates, Global, interest rate, international LOLR, lender of last resort, multiple equilibria, solvency of bank, WP

Content in this bundle

• The International Lendor of Last Resort: How Large is Large Enough? - WP/01/76
  • The International Lendor of Last Resort: How Large is Large Enough? - WP/01/76 (Markdown version)
  • The International Lendor of Last Resort: How Large is Large Enough? - WP/01/76 (PDF)