Financial Crises, Contagion, and the Lender of Last Resort A Reader

Financial crises, often of an apparently contagious nature, have become more frequent over the last two decades than they were previously. The monetary authorities, especially central banks, and, in the international context, the International Monetary Fund, have had to decide how to handlethem. This has revived interest in the analysis of the role of a Lender of Last Resort (LOLR). On the one hand, such LOLR support actions have been accused of contributing to the currently increased frequency of (systemic) crises. By providing a safety net for banking activities, they are said toencourage excessive risk taking (moral hazard), thus provoking the very crises they are supposed to prevent. On the other hand, the (surprisingly) fast recovery experienced after (most of) these crises may, perhaps, be attributed to the safety net provided by LOLR facilities, which may have dampenedreal effects by containing contagion. Currently, the need for, and the appropriate design of, a LOLR both at the national and international level is hotly debated. There are fierce controversies about how to handle crisis management.This book assembles a selection of the best available studies in this field, and illuminates both sides of the debate. After a substantial review of the literature, Part I Iooks back to the historical evolution of thought on the conduct of LOLR. Parts II and III review contemporary contributions tothe debate. Part IV explores the international aspects of these issues. Overall, this Reader provides comprehensive and authoritative coverage of the contending views on how the authorities might respond to financial crises. It will appeal to a broad readership including financial and monetaryeconomists, commentators on financial subjects, (central) bankers, financial regulators, and ministries of finance.

Charles Goodhart is Professor of Banking and Finance at the London School of Economics and Political Science. Prior to this he was Chief Adviser at the Bank of England (1980 to 1985). Gerhard Illing is Professor of Economic Theory at the University of Frankfurt.