Lender of last resort

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As lender of last resort ( english lender of last resort ) will finance an institution referred to as lender or guarantor in a corporate crisis geratenen debtors acting voluntarily or by law if this is none other more ready.

General

The term “last resort” is intended to indicate that beyond these lenders there is no longer any institution that acts as a lender. At the supranational state level, the International Monetary Fund (IMF) or the World Bank often take on this function; in the national banking system , the central bank of a state usually acts . It is a financial doctrine similar to too big to fail (see system relevance ) or "bail-out policy" (see bailout ), which is supposed to prevent the collapse of an actually bad debtor in economic life, through the contagion effects on the associated industry , an entire economy or even other states are feared.

Concept and history

The English term lender of last resort goes back to Francis Baring, 1st Baronet , who in his Observations on the Establishment of the Bank of England (1797 ) spoke of the central bank as the “ dernier resort ” (German: “last refuge”) from which all banks could expect liquidity support in the crisis. Then in 1802 Henry Thornton clarified and specified the role of the Bank of England as the “ lender of last resort ”. It was Thornton who first pointed out possible contagion effects. "If any bank goes bankrupt, there could be a general run on other institutions". With the intervention of the lender of last resort, not only the collapse of a certain debtor should be prevented, but a general crisis that this might trigger, for example that of a run (“ bank run ”) on other banks.

Intervening institutions

In the case of lenders of last resort, a distinction can be made between the state (through its government), its central bank and the IMF or other supranational organizations .

State intervention

During the financial crisis that began in 2007 , government intervention was increasingly evident when the government intervened heavily in its banking system in many countries. As Charles B. Blankart demonstrates, state support from banks made up a large proportion of a state's gross domestic product. While aid in Ireland reached 265% of GDP in 2008, it amounted to 80% in the USA and 23% of GDP in Germany. This in turn triggers an increase in national debt in the following years, which, especially in Japan, will reach well over 200% of GDP from 2010 onwards.

Central banks

Walter Bagehot already pointed out in 1873 that the central banks should be ready to grant loans unhindered with good loan collateral. Central banks, mostly state-owned and equipped with sovereign tasks of controlling the money, capital and currency markets, then function as an extended arm of the state. However, they only intervene in the banking sector, so that the function of the lender of last resort for non-banks is left to other state institutions. The central banks' function as lenders of last resort is made possible and promoted by their original tasks of supplying money to the banking sector. Originally, the minimum reserve requirement in Germany was only intended to impose statutory liquidity reserves at the central bank on the banking sector, which could be called up in the event of a crisis. They have since completely lost this function in favor of influencing the flow of money and the granting of credit.

Intervention by the IMF

The founding of the IMF goes back to the consideration that the different economic developments in individual states can lead to disparities in currencies and that the resulting currency crises can no longer be resolved autonomously by the affected state itself. This makes the IMF a typical lender of last resort. In the course of Mexico's currency crisis in 1995, the IMF granted 4.4% of Mexico's GDP as loan assistance; in the 1997 Asian crisis, South Korea received 5.3% and Thailand 2.9% of their respective GDPs as loans. The international monetary system institutionalized in the IMF is thus itself a lender of last resort. After that, states confronted with an economic crisis could count on an expansion of IMF credit. This was also the case with the 2001 Argentina crisis.

Moral risk

The lender of last resort should take efficient measures to prevent the bankruptcy of companies or a state moratorium . This financial doctrine harbors a considerable moral risk through false incentives . They give other market participants the high certainty that their bankruptcy risk, which they bear as a lender, is significantly reduced or even completely eliminated. The lender of last resort compensates, in whole or in part, for entrepreneurial errors or undesirable government developments that would normally lead to the collapse of companies or a state moratorium. With its ultimate support policy, the lender of last resort violates fundamental market and economic principles, as its intervention releases investors from the risks of their business decisions. IMF lending also carries this moral risk. Due to the likelihood of intervention by the lender of last resort, the beneficiaries are also motivated to operate more carelessly and to budget, because rescue is in prospect. Beneficiaries choose a higher global risk incentive and could therefore enter into riskier deals.

In order to eliminate or reduce the moral risk, Art. 125 TFEU prohibits the EU or member states from taking responsibility for the debts of another member state ( no bailout clause ). Art. 119 TFEU ​​only holds out the prospect of help with balance of payments problems, and under Art. 267 TFEU debts may only be borrowed for investments.

How it works and benefits

The theory of financial intermediation, particularly in the area of banking regulation , is based on the assumption that a banking system is prone to instability. So z. B. the failure of a single bank can affect the entire banking system via a domino effect . Hans-Jacob Krümmel published a theoretical model for this in 1984. It is now possible for the lender of last resort to bridge a short-term liquidity bottleneck at the first bank and thus give investors confidence in the security of their deposit. The domino effect is thus stopped.

See also

literature

  • William C. Cline: The Case for a Lender-of-Last-Resort Role for the IMF . (PDF; 79 kB) 2005
  • Hans-Peter Burghof: Equity standards in the theory of financial intermediation . Duncker & Humblot, Berlin 1998
  • Hans-Peter Burghof, Bernd Rudolph: Banking supervision . Gabler, Wiesbaden 1996
  • Thomas Hartmann-Wendels, Andreas Pfingsten, Martin Weber: Banking apprenticeship . 4th revised edition. Springer, Berlin 2007
  • Katharina Stasch: Lender of Last Resort . Nomos 2009

Individual evidence

  1. Communication from the Commission to the European Parliament and the Council. Expansion strategy and most important challenges 2009–2010 COM / 2009/0533 , accessed on August 24, 2018 here p. 59.
  2. Thomas M. Humphrey: Lender of Last Resort: What It Is, Whence It Came, and Why the Fed Isn't It ( Memento of the original from June 30, 2010 in the Internet Archive ; PDF; 241 kB) Info: The archive link was inserted automatically and not yet tested. Please check the original and archive link according to the instructions and then remove this notice. In: Cato Journal , 2010, p. 335 @1@ 2Template: Webachiv / IABot / www.cato.org
  3. ^ Henry Thornton: An Inquiry into the Nature and Effects of the Paper Credit of Great Britain , 1802, p. 180.
  4. ^ Charles B. Blankart: The State - a "Lender of Last Resort"? (No longer available online.) April 29, 2009, p. 4 , archived from the original on August 23, 2011 ; accessed on May 19, 2011 : "Lecture series: The international banking, credit and financial crisis: Analysis, causes, solutions " Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. @1@ 2Template: Webachiv / IABot / lvb.wiwi.hu-berlin.de
  5. ^ Walter Bagehot: Lombard Street , 1873, pp. 48 ff.
  6. ^ Helge Berger, Alfons J. Weichenrieder: The IMF: Insurance or Lender of Last Resort. (PDF) June 2002, p. 4 , accessed on May 19, 2011 .
  7. ^ Helge Berger, Alfons J. Weichenrieder: The IMF: Insurance or Lender of Last Resort. (PDF) June 2002, p. 5 , accessed on May 19, 2011 .
  8. ^ Helge Berger, Alfons J. Weichenrieder: The IMF: Insurance or Lender of Last Resort. (PDF) June 2002, p. 12 , accessed on May 19, 2011 .
  9. ^ Hans-Jacob Krümmel: Purpose of protection and supervisory intervention. About the run on the bank counter and its prevention . In: Kredit und Kapital , 17th year 1984, ISSN  0023-4591