On the need for an international lender of last resort: Lessons from domestic financial markets
AbstractThe increasing incidence and intensity of crises in the international financial markets during the 1990s have given new impetus to the debate on reform of the international financial system. Much of the discussion focuses on the idea of an international lender of last resort which could provide liquidity to ensure the stability of the international financial system. This paper responds to the question of whether an international lender of last resort is necessary by presenting both the differences and the similarities between a domestic financial market and an international one. This comparison will show that in regard to those aspects which justify the existence of a lender of last resort at the national level, the two types of financial markets are no different: If commercial banks are engaging in maturity and liquidity transformation, then the existence of a lender of last resort is a prerequisite to stable and crisis-free development of financial markets. Both the recent financial crises, and the developments which can be observed in the banking sectors of Latin America and Eastern Europe, provide empirical evidence for this thesis. In these regions, banking sectors are emerging which are increasingly dominated by foreign banks, and thus have indirect access to an international lender of last resort. At the same time, there is an increasing tendency within emerging markets to introduce regulations which limit the extent to which transformation is performed in financial markets, and thus to limit as far as possible the risks which make an international lender of last resort necessary. --
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Bibliographic InfoPaper provided by University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 28.
Date of creation: 2001
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lender of last resort; maturity transformation; liquidity transformation; financial crisis; currency crisis;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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