Fischer Address to Economic Forum : Frequency of Global Crises Highlights Need to Consider International Lender of Last Resort

• Author: Stanley Fischer
• Pages: 6-8

Page 6

The frequency, virulence, and global spread of financial crises in emerging market countries in the last five years, coupled with the congressional debate in the United States over the increase in IMF quotas, have led to the most serious rethinking ofthe structure ofthe international financial system since the break-down of the Bretton Woods system in 1971, Fischer said.

In the coming months and years, governments and international institutions will be putting in place a series of changes designed to strengthen the international financial system. The vision that underlies most proposals for reform of the international financial system is that the international capital markets should operate at least as well as the better domestic capital markets. To say this is to drive home the point that volatility and contagion cannot be banished, but we can surely do better in reducing the frequency and intensity of emerging market financial crises and the extent of contagion than we have in the last five years. It is urgent to start devel-oping and implementing solutions.

Fischer began by reviewing the widely accepted case for a lender of last resort in the domestic economy and noted that the lender of last resort is not necessarily the central bank. He suggested that the international system also needs a lender of last resort and that the IMF, although it is not an international central bank, has undertaken certain important lender-of-last-resort functions, generally acting in concert with other official agencies. He concluded that this role can be made more effective in the context of some of the important reforms of the international financial system now under consideration.

Domestic Lender of Last Resort

The lender-of-last-resort role of the central bank is associated with the prevention and mitigation of financial crises-a sudden or potential breakdown of an important part of the credit system. These crises are associated with a loss of confidence in the standing of some financial institutions or assets and can spread rapidly through the financial system; if unchecked, they can have significant effects on the real economy.

The lender of last resort serves at least two functions: the crisis lender, which provides the financing to deal with a crisis; and the crisis manager, which assumes the responsibility for dealing with a crisis or a potential crisis. The central bank generally, but not always, carries out both functions. In a modern system, with a flexible exchange rate, the...