An International Lender of Last Resort and the International Financial Markets

by Catherine L. Mann, Peterson Institute for International Economics

Testimony before the Standing Committee on Foreign Affairs
United States Senate
Washington, DC
April 27, 1998


This paper draws heavily on "Lender(s) of Last Resort: National and International" dated January 28, 1998. Comments to clmann@iie.com.


Increasingly the IMF is being called an international lender of last resort. What does it mean to be a lender of last resort (LOLR)? What supporting structures are required to effectively play that role? Central banks in national financial systems can (and some do) intervene to support some participants in the financial system in times of crisis. What can we learn from national LOLR experience for the occasions under which a LOLR might take action, the instruments the LOLR might use, and what supporting structures might be necessary for a LOLR to be effective in balancing the risks of financial crisis against the risks of moral hazard. If indeed the IMF is being called upon to act as an international LOLR, does it have (or can it be given) the instruments and supporting structures which appear to be necessary in the national context? If not, what are the consequences of the IMF playing with only half a deck, and is there another way out?

The bottom line is that the IMF is the only supra-national institution that can coordinate action when sovereign nations are involved, and when fast moving global financial crises demand large and immediate injections of credit. The foundation for growth in an increasingly global world is through international financial intermediation—a collapse of the international financial system cannot be risked.

However, the IMF operates without key supporting institutions and mechanisms that are integral to the environment of the national LOLR and which mitigate moral hazard. The IMF has neither a constant supervisory presence nor a fiscal redistributive authority. Consequently, IMF intervention in the current international financial environment magnifies moral hazard.

The recommendations contained in the recent communique from G-7 Finance Ministers, to improve transparency and disclosure and to strengthen national financial systems, clearly are necessary—but they are not enough. The proposed "international supervisor of the national supervisors" could help to some degree. But supervisors, to be effective, must be ever-present and have enforcement powers; authorities not given over lightly to supra-national entities. So, even as we bolster the IMF's credit line for when needed, we must seek ways to limit the occasions we resort to it.

We must focus on market-oriented solutions. The private financial market has the technical ability to create financial instruments that mitigate moral hazard and diversify risk to participants who can best bear it. The issue is how to induce the private sector to do its job.

Why have a lender of last resort? The role of the banking system, transparency, and the spillover of financial distress in the national context.


What instruments can a national LOLR use to prevent contagion or to intervene?


What are the consequences of these preventions or interventions?


What supporting structures are necessary for a LOLR to intervene and to balance moral hazard with the social value of the financial system?

The purpose of setting out the role, instruments, and supporting structures for the national LOLR is to put into sharp relief what attributes the IMF brings, or does not bring, to international financial crises.


Does the international financial system need a LOLR? Is the IMF it?


What instruments could an international LOLR use to prevent contagion or to intervene?


Do supporting structures exist to help an international LOLR balance the costs of moral hazard against the public good nature of the international financial system?


What are the consequences of intervention by the IMF?


What is to be done? A greater role for the private sector.

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