Advocates of free banks deny the necessity of government departments as lenders of last resort. It is believed that the only reason for bank panic is the legal restrictions on the banking system. Without these restrictions, a freely competitive market will produce a panic-proof banking system. Selking (Selgin, 1988, 1990) thinks that there are two main restrictions: one is the restriction that the United States sets up branches nationwide, and the other is the restriction that the commercial banking system can freely issue money. The former can realize diversified investment in assets and prevent the banking crisis caused by the decline in relative prices of assets; The latter allows commercial banks to meet private demand for money at any time.
At the same time, I believe that under the free banking system, there will be no contagious squeeze caused by incomplete information, because all the detailed information has been included in the contract of demand deposit. At the same time, they believe that clearing houses can solve the information asymmetry problem in deposit banks. Gao Dun (1985) and Gao Dun & ampmullinaux( 1987) think that the structure of the bill clearing house produced in the19th century is similar to a cartel composed of all banks, and a system of * * * issuing the same currency has been established, which makes it difficult for the public to distinguish the weaknesses of the member banks. It controls panic by issuing loan certificates similar to gold substitutes. At the same time, restricting the conversion of deposits into cash can also prevent panic. Dowd( 1984) thinks that this restriction is similar to providing an option, in which the bank reserves the right to postpone the payment to a certain point in the future, and as compensation, the bank will pay interest on the deferred payment. The central bank is not the only lender of last resort. In addition to the central bank, other institutions can also become lenders of last resort (Timberlake,1984; Baode, bordo,1986; Fischer, 1999), such as the US Treasury, clearing center and Morgan Group in 1907, all assumed the role of lender of last resort, while the Canadian Treasury and the State Administration of Foreign Exchange all rescued banks in crisis and successfully implemented the function of lender of last resort.
Goodhart pointed out that when a country has systemic problems, unless these systemic problems only include a small part of potential losses and the central bank can absorb them by itself, the central bank can solve them independently, otherwise it should be solved by the government, the regulatory authorities and the central bank. In the large-scale systemic crisis, goodhart and Schon Meck (1995) think that the government should pay the bill, and the government has the right to decide how to deal with the crisis and who will bear the losses. There are two kinds of views about the lender of last resort: providing liquidity to the whole financial market through OMOs (open monitoring operation) (monetary view), or lending directly to a single financial institution through the discount window (bank view).
From the monetary point of view, emergency liquidity supply can only be provided to the whole market through OMOs. Good friends and gold (good friend &; King, 1988), Bordo (1990) and Schwartz (1992, 1995) believe that LLR can only operate in the open market, thus improving and supplementing the high-energy money stock. Good friends & ampKing, Capie( 1999) and Keleher( 1999) pointed out that lending or discounting directly to financial institutions will make some insolvent banks not be punished by the market, which will easily lead to moral hazard of commercial banks and distort their behavior decisions. At the same time, with the high development of financial market, it provides an effective way to obtain credit financing from the private sector. The interbank market can fully consider the effective distribution of liquidity, and solvent financial institutions can obtain liquidity support through the interbank market. Therefore, specific intervention in individual banks is not only against the principle of marketization, but also unnecessary. Kaufman also believes that there is no need to help individual banks unless the central bank has obvious information advantages on their solvency. He emphasized the negative externalities of personal assistance: not only will moral hazard occur, but also the regulatory authorities will face political pressure and regulatory capture, thus increasing the negative externalities. Kaufman also expanded the connotation of LLR, thinking that LLR should prevent assets from being sold at a discount, because it would cause the loss of real wealth. He believes that although the financial market has developed rapidly and become very effective, which has promoted the improvement of the liquidity mechanism, the acceleration of transaction speed has also increased the possibility of liquidation and discount sale. The purpose of LLR is to protect balanced asset prices from temporary liquidity.
The World Bank believes that the lender of last resort can only provide liquidity support to a single financial institution. Goodhart (1999) pointed out that due to the inefficiency of the interbank market and the inability to borrow money from other banks, banks with poor liquidity but solvency will develop into insolvent banks. Finally, the lender's financial support to the market will lead to an increase in the total supply of reserves, while providing financial support to a single institution will not lead to an increase in reserves. Fisher (1999) thinks that the lender of last resort can provide loans to the market and individual institutions.
Hirsch regarded the central bank as a means to solve the market friction caused by incomplete information for the first time. He believes that the LLR function of the central bank is similar to providing an insurance, which will reduce the cost of private risks, but at the same time stimulate the moral hazard of banks. At the same time, the informal discretion given to the regulatory authorities by LLR may lead to the emergence of regulatory alliances. On the other hand, if depositors believe that big banks will not fail, the strategy of resisting public sector management will promote further concentration of banks. The appearance of these two situations is not conducive to the improvement of efficiency. Hirsch stressed that the best way is to adjust the functions of the central bank according to the characteristics of the entire financial system. The LLR rescue object of classical lender of last resort theory is very strictly limited to financial institutions with temporary liquidity shortage. However, in the practice of LLR, the complexity of the financial crisis makes LLR's aid targets gradually break through the classical liquidity boundary. Therefore, some economists believe that LLR can help those insolvent banks.
Solo (1982) believes that when there is a banking crisis, the lender of last resort should provide assistance regardless of whether the bank is insolvent or not. Take the Federal Reserve as an example. When a bank in the United States (especially a big bank) is about to fail, it will cause a crisis of confidence in the entire financial system. Since the Federal Reserve is responsible for the entire financial system, in order to avoid this situation, it must help banks that are in crisis or even insolvent. Solo also admitted that this practice would create some moral hazard, encourage other banks to take more risks, and the public lost their enthusiasm for supervising financial institutions.
Goodhart (1985, 1987) advocates that the central bank can provide assistance to insolvent banks. There are three main reasons:
First of all, when LLR must take action, it is unrealistic for the central bank to distinguish whether commercial banks are in a liquidity crisis or a liquidity crisis. When commercial banks apply for assistance from LLR, there is a potential cost of reputation loss, because even a bank with insufficient liquidity, if it borrows from the central bank, shows that it has no financing ability in the interbank market, so it is suspected of solvency. Therefore, as long as there is enough collateral, there is no need to consider whether borrowing from the central bank is a liquidity problem or a solvency problem.
Secondly, due to the special role of commercial banks in information production, if LLR bankrupts troubled institutions, valuable and irreplaceable "customer-bank" relationships will be lost, and the social benefits of maintaining these relationships exceed the cost of maintaining them.
Third, because the bankruptcy of big banks will destroy the confidence of the whole banking system, LLR will only have loans even if the big banks are insolvent.
Kaufman (1990) believes that Solow and goodhart's views underestimate the risk of excessive assistance by the lender of last resort, which may lead to an increase in the demand for more assistance by banks facing crisis in the future. They also neglected that the lender of last resort would incur additional losses and increase the cost of finally solving the problem, because it delayed the closure of insolvent institutions. Solow and goodhart didn't realize that the lender of last resort could complete its function through open market operation rather than discount window loan. In fact, with the help of open market operation, the lender's urgent demand for high-energy currency can also be met, so there is no need to worry about how to rescue individual crisis banks. Because the real economic activities and the overall economy stopped the impact of panic on the money stock, lenders finally didn't have to be afraid of the bankruptcy of individual poorly managed banks.
Goodhart and Huang (Goodhart &; Huang, 1999) believes that bank failures will lead to financial instability, and the main performance of the market is panic. At this time, it is difficult to predict the behavior of depositors, and the operation of monetary policy is also prone to errors. When the bank seeks liquidity support from the lender of last resort, it is difficult for the lender of last resort to have time to accurately judge whether the bank has solvency. If the lender of last resort provides loan assistance to the bank, but it turns out that the bank is insolvent afterwards, the lender of last resort will inevitably bear financial and reputation losses. Therefore, whether the lender of last resort rescues banks in crisis or goes bankrupt and liquidates still needs careful judgment. By establishing the moral hazard model of the lender of last resort, they think that under the one-cycle model, that is, given the probability of bank failure, the probability of lender of last resort rescue and the probability of risk, whether the lender of last resort rescues depends on the size of the bank; In dynamic and intertemporal models, that is, in the case of uncertain probability, the lender's last resort depends on the balance between moral hazard and infectious risk. If you are worried about moral hazard, the lender will carefully consider whether to implement rescue; If we pay attention to systemic risk, the lender will have the motivation to rescue at last, and the equilibrium risk of the whole market will be higher. Finally, and most importantly, excessive assistance from lenders will easily lead to moral hazard in financial institutions, especially in large banks. Therefore, measures such as imposing punitive high interest rates, organizing the private sector to participate in the rescue, implementing "constructive and vague" rescue clauses, and strictly disclosing information afterwards will help alleviate this problem.
Kaufman (199 1), Nochet and Taylor (Rochet &; Tirole, 1996) thinks that the lender of last resort will have two negative effects on the bank's rescue: on the one hand, the rescue will prompt bank operators and shareholders to take greater risks in order to obtain more rescue subsidies; On the other hand, the possibility of lender of last resort providing funds to closed financial institutions greatly reduces the enthusiasm of depositors to supervise the business behavior and performance of financial institutions, and because the rescue is to provide implicit insurance for all depositors, it will also weaken the enthusiasm of inter-bank supervision.
Mishkin (200 1) thinks that this kind of moral hazard is more serious in big banks. Big banks have greater systemic influence than small and medium-sized banks, and their business failure poses a more serious threat to the security of the financial system. Therefore, the government and the public do not want them to fail, so big banks often become the targets of regulatory tolerance. Those banks that think they are very big or important think that the lender will definitely provide financial assistance in case of insufficient liquidity or other problems, so they relax risk constraints and crisis management and engage in high-risk and high-yield businesses. The same reason also weakens the restraint of the market, because depositors know that once the bank is in trouble, the government will not let it go bankrupt, and they can't afford too much loss. In this way, they lost the motivation to supervise banks, and when banks engaged in excessive risk-taking, they did not restrict the market by withdrawing deposits. In many emerging market economy countries, when large or politically related financial institutions are in crisis, the government becomes the backup force to solve the problem. Finally, the lender puts the base money into the economy, which will greatly increase the amount of money in circulation through the role of money multiplier, thus causing inflation.
Humphrey (1985) believes that in the modern financial environment, imposing punitive high interest rates is equivalent to providing the market with a signal to accelerate the withdrawal of funds, which will aggravate the banking crisis. At the same time, bank operators will pursue higher risks in order to obtain higher income in the short term to pay high loan interest. Therefore, goodhart and Scovin Meck (1995), Pilates and Sinasi (Pilates &; Schinasi, 1999) thinks that in practice, the emergency loans of a single institution are not charged at an interest rate higher than the market interest rate, and the interbank market usually provides liquidity assistance to financial institutions at a normal interest rate.
Gianini (1999) pointed out that moral hazard can also be solved by organizing the private sector to participate in the rescue of the lender of last resort. As an agency, the central bank organizes banks with surplus funds to provide financial assistance to banks without funds. The major banks, which play the role of lender of last resort, promise to provide credit to the problem banks in times of crisis to ensure the normal operation of the banking system. But Goodfran and Lacker (1999) believe that this kind of credit behavior must be a Pareto improvement, and the central bank cannot force other banks to provide credit. If the central bank forces other banks to provide loans, or provides loans on conditions that are too biased towards crisis banks, then the loan support provided by private banks is actually a subsidy for failed banks. In the highly competitive financial market, banks with surplus funds have a competitive advantage over crisis banks, so it is difficult for the central bank to persuade the dominant banks to help their competitors out of trouble. Therefore, moral advice, the power of rules and the cultivation of cooperation consciousness are the important responsibilities of the central bank in coordinating inter-bank assistance.
Corrigan (1990) put forward the concept of "constructive ambiguity" for the first time, which means that the lender of last resort intentionally obscures the possibility of performing its duties in advance, that is, the lender of last resort indicates to other banks that it may not provide financial support in case of bank crisis. Because the bank is not sure whether it is the target of rescue, it has put pressure on the bank to operate cautiously. "Constructive ambiguity" requires the lender of last resort to be cautious and should stop the pre-commitment of whether, when and under what conditions to provide support. Lenders should strictly analyze whether there is systemic risk when making decisions. If it already exists, we should consider the best way to deal with systemic infection and minimize the negative impact on the operating rules of financial markets.
Crockett (1996) thinks that "constructive ambiguity" has two main functions: first, it forces banks to act cautiously because they don't know whether the lender of last resort will provide them with financial support; Second, when the lender of last resort provides assistance to the illiquid bank, the bank's operators and shareholders can share the cost. Management will realize that once banks fail, they will lose their jobs and shareholders will lose their capital, so moral hazard will be greatly reduced. Practice also shows that "constructive ambiguity" can directly restrain or indirectly encourage bank operators and shareholders to act cautiously, improve self-awareness of risk prevention, and enhance self-control and self-restraint ability.
Constructive ambiguity also has some limitations, that is, it gives crisis management institutions too much decision-making freedom, and decision-making freedom will bring time persistence problems. For example, at the beginning and end, the lender thought it was more advantageous not to provide guarantee for the crisis bank, but later felt that it might be more appropriate to provide financial assistance to the bank. Therefore, Enoch, Stella and Khamis (1997) believe that the discretion of the lender of last resort can be judged by strict disclosure of information afterwards. With the deepening of economic and financial globalization and the integration of capital and currency between countries, the financial crisis has spread all over the world, surpassing the boundaries of countries. All these make the problem of finding the lender of last resort in the world enter the field of vision of theorists and practitioners. Especially after the Mexican financial crisis of 1994 and the Asian financial crisis of 1998, this problem has become particularly urgent.
In the early financial history, the "world economic center" should act as the international lender of last resort. Fernand Braudel assumes that the world economy has a certain geographical scope. "There is always a pole or center represented by the dominant cities and polis (that is, economic capital, but not necessarily political capital). In the financial crisis, when a country's difficulties will go beyond its borders, the dominant center is considered to have the responsibility to act as the lender of last resort to other countries. This is the earliest theoretical hypothesis about who will act as the international lender of last resort.
At present, it is generally believed that it is more appropriate for the International Monetary Fund (IMF) to assume the role of international lender of last resort. A research report by Stanley Fisher pointed out that although the IMF is not an international central bank, it can still perform the function of international lender of last resort and will do well. He believes that the IMF, as a borrower of the crisis, is more like a credit cooperative organization, which establishes a reservoir of funds by issuing fund shares and then lends to member countries; As a crisis manager, it can organize and coordinate member countries in crisis and raise more funds.
Another view is that the Bank for International Settlements (BIS) can perform this function. The Bank for International Settlements, known as the Club of Central Bank Governors, has been actively promoting mutual assistance and cooperation among central banks. Because senior officials of central banks often meet and discuss through the Bank for International Settlements and maintain regular contact, this arrangement is more timely than the assistance of the International Monetary Fund, and there are no conditions attached. However, its positive role in this regard is limited to its member countries, and it is basically out of reach with developing countries. The financial crisis in developing countries is more common than that in developed countries, so this kind of assistance from the Bank for International Settlements is limited. With the continuous expansion of transnational financial services and the continuous integration of financial systems in various countries, the liquidity and efficiency of the EU market are constantly enhanced, and the financial systems of European countries are more closely linked. The ensuing financial turmoil will spread to more member countries, especially if a pan-European banking group, which includes a number of licensed banks and operates in several member countries, has a liquidity shock, which will inevitably systematically implicate the financial markets of various countries and the entire European financial system. Garry J. Schinasi and Pedro Gustavo Teixeira(2006) studied how to realize the function of lender of last resort when systemic financial turmoil affects more than one EU member state. In their view, there are several alternative coordination modes for bank groups to exercise the function of lender of last resort:
The first model relies on detailed arrangements in advance and is considered as the "Nordic model". This model was put forward in the memorandum of understanding of the Nordic Central Bank, which is suitable for operating in two or more Nordic countries in the event of a banking crisis. Once a crisis is discovered, the relevant central bank will establish a coordination mechanism, that is, a crisis management team. Under the leadership of the central bank, which has jurisdiction over the banking group, the crisis management team focuses on the information collection and analysis of the financial situation and potential systemic impact of the banking group. In addition, it also pays attention to contact with the bank management. The group is also responsible for reporting to the decision-making bodies of central banks, including information on the systemic relevance of the crisis, the solvency of the affected banks, and most importantly, clarifying the differences of opinion among central banks so that they can understand the situation and make coordinated decisions. The main advantage of this model is that it can minimize the asymmetry of information and analysis among central banks, thus reducing the occurrence of "prisoner's dilemma".
The second coordination mode is "supervision mode". Because the implementation of the new Basel Accord will enhance the coordination function of consolidated supervisors, compared with other central banks, the central bank where consolidated supervisors are located can undertake the coordination function, which also means that a central bank bears more responsibilities to banking groups than other central banks. For example, this model needs to consider more solvency and systemic risks within the group or within the EU (relative to domestic). Just like the role of consolidated supervisor, this gives the central bank a certain "federal" function to the banking groups under its jurisdiction.
Third, the obligations undertaken by central banks include information exchange and coordination of policies and measures under the current operating system framework. The First Lender of Sovereign Debt Restructuring (LFR)
Daniel cohen and Richard portes (2006) put forward a policy intervention mechanism to solve the sovereign debt problem-the first lender function of ——IMF to solve the structural defects of international capital flows. Members of the International Monetary Fund should formulate a debt system in advance, which means the active commitment of participants, not only the country, but also the International Monetary Fund. The IMF should establish an adjustment plan (project) with the country in advance (that is, the time when the country can enter the financial market) rather than after the crisis, and take preventive measures to prevent the debt from worsening. The IMF project and its implementation should convince people that this country can re-enter the market quickly at a "risk-triggered" interest rate, or at a rate lower than the "risk-triggered" interest rate. This is an appropriate catalytic role of IMF loans.