Welcome to free paper download website

Debt market

You are here: Home > Securities financial > Debt market > content

Summary of theory and its development of the lender of last resort

Author: ChenLiuQin Wang Yu From: www.yourpaper.net Posted: 2007-11-19 13:18:28 Read:
[Abstract] the face of unpredictable financial markets, the ultimate lenders how to effectively guard against and defuse financial risks and to reduce the moral hazard of financial institutions, is one of the important issue facing countries today. This paper first introduces the basic viewpoints of the lender of last resort, and pointed out that the rapid changes in the financial environment of the lender of last resort in the traditional sense theory poses a severe challenge. On this basis, the paper summarizes the literature of modern lender of last resort theory focus review modern lender of last resort an important content of the theory - the prevention of moral hazard.


[Words] lender of last resort; moral hazard; constructive ambiguity



In the modern banking system, when the interbank relief is not sufficient to provide protection against liquidity shocks to commercial banks, to prevent a single bank liquidity crisis to a systemic banking crisis or even the entire market transformation as The central bank lender of last resort to provide liquidity support and assistance. Lender of last resort function is the basic institutional features of the central bank, monetary policy functions and financial regulatory function is the lender of last resort function further extended. Face of the unpredictable situation in the financial markets, the ultimate lenders how to effectively guard against and defuse financial risks and to reduce the moral hazard of financial institutions, is an important issue facing countries today.
Lender of last resort (Lender of Last Resort) is intermediation responsibility should the central bank in times of crisis, it should meet the needs of high-powered money to prevent contraction of the money stock caused by the panic ("New Pal Graves monetary and financial Dictionary "). When some commercial banks are insolvent but temporary lack of liquidity, the central bank through the discount window or open market purchase of two ways to grant emergency loans to banks, they have good collateral and pay punitive interest rates. Lender of last resort facility, announced the temporary lack of liquidity will be commercial banks to ease public fears of cash shortages, to a certain extent, this is sufficient to stop the panic and do not need to take any action.
A lender of last resort theory basic viewpoints
In 1797, Bahrain (Baring) jazz in his the writings about the functions of the Bank of England has a "bank of banks", first proposed the "lender of last resort "The concept, he pointed out that all insolvent banks to the central bank borrowings in the event of a crisis. Thornton (Thornton, 1802) and Bagehot (Bagehot, 1873) discusses the theory of the role of the central bank as a lender of last resort, they used to stop a bank panic and crisis rules to clarify the thinking.
(A) Thornton's point of view. In 1802, Thornton article demonstrated the feasibility of the lender of last resort. He pointed out that, in the face of banking panics, the Bank of England should play the role of lender of last resort to provide liquidity to the market, to provide cash. He believes that as long as the banks have encountered panic good solvency can provide them with loans to tide over their difficulties. Thornton appear for a lender of last resort for two reasons: First, the portion of the reserves of the banking system; monopoly of the central bank to issue coins and bank notes of high-powered money based. This is the first exposition of the lender of last resort functions, principles.
Thornton is the first lender of last resort to determine is the function of a currency economist. He believes that the main role of lender of last resort to prevent bank panics caused by monetary contraction, and monetary contraction will bring repressed economic activity. When you increase public suspicion of bank solvency, will lead to a demand for high-powered money exponentially. The public doubtful bank debt converted into cash, the bank began seeking to increase its high-energy currency reserves. Cash and reserves with notes and deposits ratio improved to reduce the total multiplier Contact the energetic currency with currency lender of last resort must be compensatory growth of the monetary base in order to offset the decline in the money multiplier, in order to maintain the currency of the economic life quantity.
Thornton pointed out, the lender of last resort function can be set up in different monetary system, the central bank's target and support those systems. As in the fixed exchange rate, gold standard, the lender of last resort to help protect the gold reserves of the central bank, thus ensuring a convertible at a fixed rate notes and gold. Lender of last stop bank panics, raise the discount rate to attract foreign gold and to use their own bills issued to adjust the demand for high-powered money to alleviate the urgent needs of the gold. In non-convertible notes and floating exchange rate system, the lender of last resort to prevent the catastrophic collapse of the money stock to help stabilize the purchasing power of the monetary unit.
Thornton considered the responsibility of the lender of last resort for the economy as a whole, rather than for a commercial bank. In any case, the lender of last resort should not be maintenance insolvent banks, even those that are considered too big to fail banks. This bank will encourage them too much adventure, leading to more demand for the lender of last resort. To avoid this problem of moral hazard, the lender of last resort should be allowed to collapse of ailing banks, its responsibility just efforts to curb the spread of the collapse of. Therefore, the responsibility of the lender of last resort is a macro, rather than micro.
(B) Bagehot's point of view. The British economist Bagehot (1873), inheritance and development Thornton (1802), many of the views he published in 1873 a book incisive interpretation of the lender of last resort principle. Bagehot pointed out in the book, the central bank must have a scale appropriate, readily disposable reserves, in order to support the crisis, banks in the bank panic. With the view of Thornton, Bagehot also emphasized in the gold standard conditions, the lender of last resort should support the central bank to protect the metal reserves to ensure the convertibility of the currency with gold. Bagehot put forward, when the Bank of England as lender of last resort to intervene and save the entire monetary system, it should comply with the four basic principles: 1, to provide loans at punitive interest rates, commercial banks can not be operating as current loans. 2, the central bank prior statement would meet debt service and mortgage conditions banks to provide loans. 3, the loans can only provide to debt service and mortgage (the ability of the bank panic occurred before the nominal price measure). 4, only to fall into a liquidity crisis, not the bankruptcy of banks to provide loans.
Bagehot put forward the basic principles of lender of last resort, to reflect some of his new perspectives of different and Thornton. First, Bagehot think the responsibility of the lender of last resort is not just in a panic during market liquidity also includes prior publicly announced will be quick and strong commitment to provide loans in the future all panic period. This commitment to greatly reduce the uncertainty of the future of the public, so that they generate stable expectations, and thus improve the effectiveness of the lender of last resort. Second, Bagehot advocated the lender of last resort to punitive interest rates adjust. Punitive interest rates not only to protect the gold reserves, but also to meet the equitable distribution of the standard (borrowers should be the lender of last resort to provide protection and assistance to pay remuneration). In addition, punitive interest rates also apply for assistance from other bank liquidity crisis can be avoided, and occupied the reserves of the lender of last resort. Eventually the lender will limit the expansion of high-powered money to a minimum, that the urgent issue of high-powered money allocated to the most valuable users, as allocated to high prices in the free market like any scarce goods and resources. Bagehot determine the type of the borrower's lender of last resort to financing, the types of assets and to accept the standard of the assets. Lender of last resort should provide loans to any qualified borrower in the event of a panic. Restrictions borrower solvency, is only a temporary lack of liquidity, collateral in normal times is good (including temporary decline in value due to the stock market panic but usually the excellent notes or bonds).
(C) the development of the classical theory. Modern economists continue study of Bagehot's view and proposed a variety of views. Humphrey (Humphrey, 1975) summed up his Bagehot thought and modern, and the recommendations of the lender of last resort the classical economics Party Bagehot represented summarized into the following aspects. 1, the lender of last resort will not be time for the subject to the the panic threat of bank generously providing unlimited cash support. 2, the responsibility of the lender of last resort is the financial system as a whole, rather than some banks. 3 important responsibility of the lender of last resort to prevent panic caused by currency reserves have shrunk. 4, the presence of lender of last resort is not in order to avoid the occurrence of the crisis, but in order to mitigate the financial impact. 5, lender of last resort has the dual task of one by the the panic threat of bank to provide unlimited assistance to the public to know that it will provide unlimited bailout for future panic. 6, the final lenders willing to provide loans for banks with good assets pledged Ultimately the responsibility of the lender is to prevent the spread of panic large range, rather than to rescue insolvent banks. 8, all provide rescue loans should be high interest rates, punitive. The central bank should be strictly in accordance with the price factor, rather than the use of non-price mechanism to limit the lender of last resort rescue loans. Modern supporters of the classical theory of Bagehot study a limit. Friedman (Friedman, 1960), Goode Flanders and gold (Goodfriend & King, 1988) that if the lender of last resort to provide liquidity, rather than through open market operations and discount window loans he made eligibility requirements, punitive interest rates, as well as virtually all measures to ensure that the assistance served credible borrowers are unnecessary.
 1/4    1 2 3 4 Next Last
Please consciously abide by Internet-related policies and regulations.
Tips: Log in to comment, the user name to enter comments directly from your personal space, so that more friends to meet you.

Sponsored Links

Sponsored Links

Top