Lender of last resort

As a lender of last resort ( " lender of last resort " ) and lender of last resort will be referred to an institution in the financial sector, which acts as a lender or guarantor if the debtor voluntarily or on a statutory basis, if this is none other more ready. On supranational state level often takes over the IMF this function in the national banking system usually occurs the central bank of a country. It is a financial doctrine as " too big to fail " or " bail-out " policy, which is to prevent the collapse of a real credit unworthy debtor in the economy, by the contagion effects on the associated industry, an economy as a whole or even to other states can expect.

Concept and history

The term lender of last resort dates back to Sir Francis Baring, who in his " Observations on the Establishment of the Bank of England " (1797 ) spoke of the Central Bank as the " dernier resort" ( last refuge ), in all of the banks the crisis might expect liquidity support. Thereafter, clarified and specified Henry Thornton 1802, the role of the Bank of England as lender of last resort. Thornton was also the first time pointed to possible contagion effects. " If any bank go bust, a general run could take place at other institutions". With intervention of the lender of last resort is not only the collapse of a particular obligor be prevented, but it may make a general crisis triggered, for example, a bank- runs.

Encroaching institutions

Depending on who acts as a lender of last resort, one can distinguish between the state (through its government ), the Central Bank and the IMF and other supranational organizations.

State intervention

During the financial crisis from 2007, government interventions were reinforced to watch, when the state intervened massively in many countries in its banking system. As Charles B. Blankart proves that government support of banks reached a high share of the gross domestic product of a country. While in Ireland that helps reached 265 % of GDP in 2008, they amounted to 80 % in the U.S. and in Germany 23% of GDP. This in turn triggers an increase in government debt in subsequent years, in Japan from 2010 to reach the particular well over 200 % of GDP.

Central banks

Even Walter Bagehot pointed out in 1873 that central banks should stand ready unhindered to extend credit with good credit collateral. Central banks, mostly state-owned and equipped with sovereign functions of the control of the money, capital and foreign exchange markets, act as an extended arm of the state. However, they only intervene in the banking sector, so that the lender of last resort function in non-banks continue to be left to other state institutions. Your role as lender of last resort is made possible and encouraged by its original mission of the money supply of the banking sector. Originally, the reserve requirement was in Germany about simply intended the banking sector impose statutory liquidity reserves at the central bank, which were available in the event of a crisis. Meanwhile, they have this function completely lost in favor of the influence of money in circulation and the credit granting.

IMF intervention

The establishment of the IMF goes back to the idea that the different levels of economic development may lead to disparities in individual countries and currencies resulting currency crises can not be autonomously removed by the affected State itself. Thus, the IMF is a typical lender of last resort institution. During the currency crisis in Mexico in 1995, the IMF granted 4.4% of Mexico's GDP as credit support, received during the Asian crisis in 1997 South Korea 5.3%, Thailand 2.9 % of their GDP as loan funds. The institutionalized in the IMF international monetary system is thus itself a lender of last resort. Then could States, who faced an economic crisis, expect an expansion of IMF loans. This was also true of the Argentine crisis of 2001.

Moral hazard effect

The lender of last resort to prevent by effective measures the insolvency of companies or a government moratorium. Unmistakable is the moral hazard result of this financial doctrine. By they receive to other market participants, the level of certainty that their insolvency risk, which they as lenders are ultimately subject to significantly reduced or even completely disappear. Entrepreneurial errors or government failures are wholly or partially compensated by the lender -of -last- resort function, which would normally lead to the collapse of companies or the state moratorium. The Lender of Last Resort in breach with its ultimate support policy against fundamental market-based and economic principles, since its intervention, the investors of the risks of their business decisions ultimately release. The IMF lending is subject to this moral hazard effect. In addition, the beneficiary of which debtors are motivated by the Eingreifwahrscheinlichkeit the lender of last resort, careless to do business and to economize because you will indeed saved. Beneficiaries choose a higher global risk incentive and therefore able to enter into riskier activities.

In order to eliminate the negative consequences of moral hazard or reduce, Article 125 TFEU prohibits that the EU or Member States for the debts of another Member State vouch ("no bailout" = "Not mutual assistance clause "). Article 119 TFEU provides assistance with balance of payments problems only in view, and liabilities under Article 267 TFEU may be taken only for investment.

Operation and Advantages

In the theory of financial intermediation, especially in the area of banking regulation, there is the assumption that a banking system prone to instability. Thus, for example, the failure of a single bank capture the entire banking system through a domino effect. A theoretical model to published Hans-Jacob Krummel 1984. The lender of last resort, it is now possible at any time, to bridge a short-term liquidity crunch in the first bank and to give investors the confidence in the safety of their deposit. The domino effect is thus stopped.