International Lender of Last Resort: A Concept in Search of a Meaning, mimeo

Bagehots rules for the lender of last resort (LOLR) were designed for a solvent bank that suffered from a mismatch in the maturity structure of assets and liabilities. These rules are more difficult to apply in the open and integrated economies of today. There is no obvious international counterpart to the domestic provider of LOLR. On the one hand, the IMF acts as a de-facto international LOLR; on the other hand, the IMF as well as the BIS act as crisis managers. In light of this evolution, the recommendation of the Meltzer Commission to charge the IMF as an international LOLR (I-LOLR) to countries that meet specific standards is an improvement over the current practice of conditionality lending. But neither pre-commitment nor conditionality alone is sufficient. Banking standards and adherence to the BIS core principles of banking supervision are essential minimum steps in domestic financial management, albeit often missing in emerging market countries. These standards should be required, together with basic accounting principles and insolvency law, as conditions for any repeated international financial facilities to a country. Currently, the IMF is the crisis manager, assessor of standards, the I-LOLR, and the post-lending credit monitor. This commingling of responsibilities in one institution is not desirable and is bound to lead to conflicts of interest. The IMF should not set international standards, monitor these same standards, and enforce them in lending decisions, especially if the latter remain politically determined