Financial Crises, Contagion, and the Lender of Last Resort: A Reader

Financial crises, often of an apparently contagious nature, have become more frequent over the last two decades than they were previously. The monetary authorities, especially central banks, and, in the international context, the International Monetary Fund, have had to decide how to handle them. This has revived interest in the analysis of the role of a Lender of Last Resort (LOLR). On the one hand, such LOLR support actions have been accused of contributing to the currently increased frequency of (systemic) crises. By providing a safety net for banking activities, they are said to encourage excessive risk taking (moral hazard), thus provoking the very crises they are supposed to prevent. On the other hand, the (surprisingly) fast recovery experienced after (most of) these crises may, perhaps, be attributed to the safety net provided by LOLR facilities, which may have dampened real effects by containing contagion. Currently, the need for, and the appropriate design of, a LOLR both at the national and international level is hotly debated. There are fierce controversies about how to handle crisis management. This book assembles a selection of the best available studies in this field, and illuminates both sides of the debate. After a substantial review of the literature, Part I Iooks back to the historical evolution of thought on the conduct of LOLR. Parts II and III review contemporary contributions to the debate. Part IV explores the international aspects of these issues. Overall, this Reader provides comprehensive and authoritative coverage of the contending views on how the authorities might respond to financial crises. It will appeal to a broad readership including financial and monetary economists, commentators on financial subjects, (central) bankers, financial regulators, and ministries of finance. Contributors to this volume - Charles Goodhart, London School of Economics and Political Science Gerhard Illing, University of Munich Xavier Freixas, Universitat Pompeu Fabra, Barcelona Curzio Giannini, Banca d'Italia, Roma Glenn Hoggarth, Bank of England Farouk Soussa, Bank of England Henry Thornton (deceased) Walter Bagehot (deceased) Thomas Humphrey, Federal Reserve Bank of Richmond Robert Keleher, Federal Reserve Bank of Atlanta Michael Bordo, Rutgers University Richard Timberlake, University of Georgia Marvin Goodfriend, Federal Reserve Bank of Richmond Robert King, Boston University George Kaufmann, Loyola University Fred Hirsch, University of Warwick Robert Solow, Massachusetts Institute of Technology M. J. Flannery, University of Florida Olivier De Bandt, Banque de France Philipp Hartmann, European Central Bank Douglas W. Diamond, University of Chicago Philip Dybvig, Washington University Franklin Allen, University of Pennsylvania Douglas Gale, New York University Y. Chen, National Taiwan University Bruno M. Parigi, University of Padua Jean-Charles Rochet, Universite des Sciences Sociales, Toulouse Forrest Capie, City University, London Anna Schwartz, NBER, New York R. Brealey, London Business School Stanley Fischer, IMF, Washington, DC