Rethinking the Lending of Last Resort Function: A Historical and Contemporary Perspective

The renewed interest in reforming the international monetary and financial system is not surprising if we look at the unexpected succession financial crises in the last decade of the twentieth century and at the first global crisis of the twenty-first century. Why did these crises occur? Most observers and policymakers agreed that the financial sector fragility has played a central role in explaining the outbreak of the more recent crises. In fact, the financial crises of the 1990s were distinctive in that they were primarily rooted in poorly regulated bank-based financial systems (Freixas et al., 2000; 2004; Calomiris, 2000; Arestis et al., 2001; Eichengreen, 2002); and the widespread of the 2008 economic and financial crisis has again dramatically highlighted the fear that the interbank market might not function properly failing to recycle the emergency liquidity provided by the central banks. This might be seen as a form of bank run that origins when financial intermediaries refuse to renew credit lines to other intermediaries, thus putting at risk the survival of the system (Freixas and Parigi, 2008). Undoubtedly, if on the one hand it seems that there has been considerable progress after the twentieth century financial crises in setting and implementing new international financial standards, on the other hand much less progress has been made with respect to strengthening safeguard measures against the widespread of financial crises.