Central banks as lenders of last resort: Lessons from the Asian contagion

Abstract

This paper discusses some of the lessons learnt from the use of the ‘bail‐out’ technique in the financial crises in Thailand, Korea and Indonesia in 1997–8. While the solution to debt crises in the past relied upon debt restructuring techniques which involved directly creditors and debtors, a distinct feature in the recent Asian financial crises, as well as in the Mexican crisis in 1994–5, is the massive amount of public funding — from bilateral and multilateral sources — that has been made available to shore up the crisis. The need for immediate disbursal of vast sums of money as well as the speed with which the crisis evolved, prompted governments to provide financing in a way that is reminiscent of the emergency liquidity assistance provided at a domestic level by the lender of last resort role of the central bank. By analogy to the bank‐to‐bank (micro) contagion that provides the theoretical rationale for the domestic lender of last resort, the country‐to‐country (macro) contagion and associated quick loss of confidence is the main argument put forth to justify the role assumed by the International Monetary Fund as de facto international lender of last resort in the late 1990s.

Citation

Lastra, R.M. (1999), "Central banks as lenders of last resort: Lessons from the Asian contagion", Journal of Financial Regulation and Compliance, Vol. 7 No. 3, pp. 234-242. https://doi.org/10.1108/eb025011