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IMF lending and creditor moral hazard

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Author Info
Andrew G Haldane
J"rg Scheibe

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Abstract

Existing empirical evidence on the effects of IMF intervention on debtor and creditor incentives - so-called moral hazard - is mixed. A new test of creditor moral hazard is developed, which uses some new data and some more stringent identifying restrictions. The test examines the response of the market valuation of UK banks to IMF loan packages. It finds a significant positive response for UK banks, with abnormal returns of over 1% in a number of cases. These excess returns are greater, the larger is the IMF package and the larger is the size of the creditor banks' emerging market portfolio. This effect is significant even once the potentially welfare-enhancing effect of IMF loans in offsetting overpricing problems in international capital markets is controlled for. In short, concrete evidence is found of creditor-side moral hazard associated with IMF support.

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Paper provided by Bank of England in its series Bank of England working papers with number 216.

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Handle: RePEc:boe:boeewp:216

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Timothy D. Lane & Steven Phillips, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  2. Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor country moral hazard," Money Macro and Finance (MMF) Research Group Conference 2003 34, Money Macro and Finance Research Group. [Downloadable!]
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  3. Richard Brealey, 1999. "The Asian Crisis: Lessons For Crisis Management And Prevention," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 111-124. [Downloadable!] (restricted)
  4. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Isabel Schnabel & Giovanni Dell'Ariccia & Jeromin Zettelmeyer, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund. [Downloadable!]
  6. Saporta, Victoria & Andrew G Haldane & Gregor Irwin, 2003. "Bail-Out or Work-Out? Theoretical Considerations," Royal Economic Society Annual Conference 2003 181, Royal Economic Society. [Downloadable!]
  7. Jeanne, Olivier & Zettelmeyer, Jeromin, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  8. Brealey, Richard, 1999. "The Asian Crisis: Lessons for Crisis Management and Prevention," International Finance, Blackwell Publishing, vol. 2(2), pages 249-72, July. [Downloadable!] (restricted)
  9. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  10. Morris, Stephen & Shin, Hyun Song, 1999. "Risk Management with Interdependent Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 52-62, Autumn.
  11. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, 04. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gregor Irwin & David Vines, 2005. "The efficient resolution of capital account crises: how to avoid moral hazard," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 233-250. [Downloadable!]
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  2. Jong-Wha Lee & Kwanho Shin, 2005. "IMF Bailouts and Moral Hazard," International Finance 0501005, EconWPA. [Downloadable!]
    Other versions:
  3. Prasanna Gai & Ashley Taylor, . "International financial rescues and debtor-country moral hazard," Bank of England working papers 217, Bank of England. [Downloadable!]
    Other versions:
  4. Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 29 Mar 2004. [Downloadable!]
  5. Benu Schneider, 2005. "Do Global Standards And Codes Prevent Financial Crises? Some Proposals On Modifying The Standards-Based Approach," UNCTAD Discussion Papers 177, United Nations Conference on Trade and Development. [Downloadable!]
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