Emergency Liquidity Support Facilities
IMF Working Papers, April 1, 2000
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- Emergency Liquidity Support Facilities
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Bibliographic details
- Authors: Dong He
- Published: April 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451850192.001
Summary
- This paper discusses operational aspects of official emergency liquidity support to individual institutions under stress.
- It argues that properly designed lending procedures, clearly laid-out authority and accountability, as well as disclosures rules, will:
- promote financial stability,
- reduce moral hazard,
- and protect the lender of last resort from undue political pressure.
- Although there may well be good reasons to maintain ambiguity over the conditions for assistance, there are important advantages for developing, and for transition economies to follow a rule-based approach by setting out ex ante the necessary conditions for support, while maintaining that meeting such conditions is not sufficient for receiving support.
Major arguments and operational considerations
- Properly designed lending procedures:
- clarify operational implementation of emergency liquidity support.
- Clearly laid-out authority and accountability:
- help to insulate the lender of last resort from undue political pressure.
- Disclosure rules:
- can contribute to reducing moral hazard and enhancing financial stability.
- Ambiguity versus rule-based approaches:
- Ambiguity over conditions for assistance can be justified in some cases.
- Important advantages exist for developing and transition economies to adopt a rule-based approach that sets out ex ante necessary conditions for support, with the caveat that meeting such conditions is not sufficient for receiving support.
Policy recommendations and implications
- Design and adopt lending procedures that are transparent and operationally clear.
- Establish and document authority and accountability frameworks for emergency liquidity support decisions.
- Implement disclosure rules that balance transparency with the need to avoid exacerbating runs or moral hazard.
- For developing and transition economies, consider specifying ex ante necessary conditions for support within a rule-based framework, while retaining discretion so that satisfying those conditions does not automatically guarantee assistance.
Content in this bundle
- Emergency Liquidity Support Facilities - WP/00/79