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

by Goodhart, Charles; Illing, Gerhard

• ISBN13: 9780199247219
• ISBN10: 0199247218
• Format: Paperback
• Copyright: 2002-03-28
• Publisher: Oxford University Press

Summary

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.

Author Biography

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.

Table of Contents

Introduction	1	(26)
Charles Goodhart
Gerhard Illing
Lender of Last Resort: A Review of the Literature	27	(30)
Xavier Freixas
Curzio Giannini
Glenn Hoggarth
Farouk Soussa
PART I. HISTORICAL ANALYSIS
An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (excerpts)	57	(10)
Henry Thornton
A General View of Lombard Street (excerpts)	67	(6)
Walter Bagehot
The Lender of Last Resort: A Historical Perspective	73	(36)
Thomas M. Humphrey
Robert E. Keleher
The Lender of Last Resort: Alternative Views and Historical Experience	109	(18)
Michael D. Bordo
The Central Banking Role of Clearinghouse Associations	127	(18)
Richard H. Timberlake, Jr.
PART II. CONTEMPORARY ANALYSIS
Financial Deregulation, Monetary Policy, and Central Banking (excerpts)	145	(24)
Marvin Goodfriend
Robert G. King
Lender of Last Resort: A Contemporary Perspective	169	(18)
George G. Kaufman
The Bagehot Problem	187	(14)
Fred Hirsch
On the Lender of Last Resort	201	(12)
Robert M. Solow
Financial Crises, Payment System Problems, and Discount Window Lending (excerpts)	213	(14)
Mark J. Flannery
Myths about the Lender of Last Resort	227	(22)
Charles Goodhart
PART III. BANK RUNS AND CONTAGION
Systemic Risk in Banking: A Survey	249	(50)
Olivier De Bandt
Philipp Hartmann
Bank Runs, Deposit Insurance, and Liquidity	299	(16)
Douglas W. Diamond
Philip H. Dybvig
Optimal Currency Crises	315	(44)
Franklin Allen
Douglas Gale
Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities	359	(20)
Yehning Chen
Financial Contagion	379	(28)
Franklin Allen
Douglas Gale
Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank	407	(30)
Xavier Freixas
Bruno M. Parigi
Jean-Charles Rochet
PART IV. AN INTERNATIONAL LENDER OF LAST RESORT?
Can there be an International Lender-of-Last-Resort?	437	(12)
Forrest Capie
Earmarks of a Lender of Last Resort	449	(12)
Anna J. Schwartz
Meltzer Report of the International Financial Institution Advisory Committee, March 2000 (excerpts from Chapter 2)	461	(10)
The Asian Crisis: Lessons for Crisis Management and Prevention	471	(20)
Richard Brealey
On the Need for an International Lender of Last Resort	491	(20)
Stanley Fischer
Pitfalls in International Crisis Lending	511	(36)
Curzio Girannini
Index	547