The lender of last resort function under a currency board: The case of Argentina
type: Item
instance of: scholarly article
title: The lender of last resort function under a currency board: The case of Argentina
zbMATH Open document ID: 0900.90055
DOI: 10.1007/BF01886217
author: Gerald jun. Caprio
author: Danny Leipziger
author: Carl Walsh
author: Michael P. Dooley
published in: Open Economies Review
publication date: 1998-06-04T00:00:00Z
review text: The role of a central bank as the lender of last resort for financial institutions has a long history. The evolution of dominant commercial banks, such as the Bank of England and other European commercial banks, from private institutions to government agencies, and the establishment of the Federal Reserve system in the United States, were strongly influenced by the perceived inability of private institutions to stop financial panics. The analytical argument for this government function has been refined considerably in recent years. There is now widespread, but not universal, agreement that asymmetric information, which accounts for the existence of financial intermediaries, also makes them prone to self-perpetuating declines in asset values during a ``panic''. Modern, fractional reserve banking systems are inherently unstable in that, although an incentive compatible regulatory framework will encourage bankers to insulate their portfolio from diversifiable risk, common shocks -- systemic risks -- reduce the market value and banks' assets. Any system in which the value of bank liabilities do not also decline is viable only if a lender of last resort is willing and able to transfer wealth to depositors. This implicit liability taken on by such a lender of last resort (LOLR) can be reduced in a number of ways but not entirely eliminated. An LOLR steps in because bank failures entail economic costs related both to a break-down of the payments system and the special role banks play in evaluating credit risks. It is also widely accepted that the existence of a lender of last resort is itself a distortion that can reduce the probability of declines in asset values but at the cost of subsidizing private investment decisions that reinefficient and potentially very costly. The solution currently in place in industrial countries is that institutions benefiting from lender of last resort facilities are constrained both in their investiment decisions and in their capital and lia…
Mathematics Subject Classification ID: 91B28
Mathematics Subject Classification ID: 91B64
zbMATH DE Number: 1069814
MaRDI profile type: Publication
cites work: Financial Capacity and Output Fluctuations in an Economy with Multi-Period Financial Relationships
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description: scientific article; zbMATH DE number 1069814