Lender Of Last Resort

This dissertation researches the theory of Lender of Last Resort (LLR). LLR is originated in early 19 century in England and two English economists Thornton and Bagehot should be given a great deal credit for their dedication to the classical LLR. After their creation, the development of LLR has been giving more attention to the issues as follows: the difference of insolvency and liquidity, the opinion of free banking school, the choice of discount lending and open market operation, the pros and cons of the penalty interest rate, and lastly who should be the institute that take the role of LLR. After I review the related literature, I put out a public goods framework for studying LLR.Firstly, financial system has always been facing kinds of shock and financial system is innate fragility as well as market failure among financial sector, so financial crisis is always apt to take place in financial system. Then there are both a need of government intervention and a public security net for financial stability. The LLR is such a main security net for preventing and managing financial crisis, which is supplied by central bank. The LLR give us the utility of financial stability that promote economic growth and social well-being. There is, however, a production cost for LLR, and we cannot enjoy the utility without payment for it. Although there may be moral hazard came out from the LLR, we don't hesitate if the utility is more than the cost. The price of LLR isn't the penalty interest rate charged by the LLR, which is the LLR's psuedoprice. The really price is the taxes on financial institutions and the public taken by fiscal bureau according to the cost of LLR.Secondly, this thesis analyzed the domestic LLR. There are two cases for the domestic LLR. One is the case where there is not an Explicit Deposit Insurance System (EDIS). We discuss some key issues about domestic LLR such as Central Bank dominating other agency (e.g. Treasury), the scope of LLR's support, the conditions of LLR. Moreover, we argue that the LLR coincides with Central Bank monetary policy. The other case is where there is an EDIS that is also a security net for financial stability. At this case, however, the LLR managed by Central Bank is again the main security net for financial stability, i.e., the EDIS doesn't change the position and main public accountability of Central Bank among financial system. Atthe same time, the EDIS and LLR should have a clear function distribution in order to prevent overlapping responsibilities between LLR and EDIS.Thirdly, this dissertation studies the international LLR (ILLR), which is a nature extension of domestic LLR. At any rate, as long as there is financial contagion among countries there is a strong need for public goods such as ILLR, which can help to achieve international financial stability and promotes the whole global well-being. Although the international community does need an ILLR, there is a disequilibrium distribution of the utility and cost of ILLR. According to this thesis, we can find that the five main developed industry countries, i.e., the U.S., the U.K., the Japan, the German, and the France, have a decision speaking at the de facto ILLR activities. These countries domestic political economic interests make a great influence on the policymaking of de facto ILLR such as International Monetary Fund (IMF), which is a potential risk to global financial stability. We need, however, a real and formal ILLR for global financial community that is the main argument of this sector.Lastly but not least, this dissertation applies the theory developed above to the realization of LLR. From the discussions on the LLR history of Australia, United Kingdom, and United States, we found that the LLR can play a huge and non-replacement role in promoting and maintaining financial stability. Before the setting up of Central Banks or improperly using LLR, there are always serious financial crises in the above three countries during 19 century or before it. After the Central Bank have made a proper use of LLR, these countries all have been surviving a long time more than 70 years financial stability. The differences of performance of financial system may have resulted from other factors such as the development of the structure of financial system, but the main and key factor that has promoted the financial stability is the effective LLR supplied by Central Bank of these countries. Then the last chapter of this dissertation studied the Chinese LLR. We found the Chinese LLR is not a very effective LLR, instead a low effective LLR charactering the transformation of China. The Chinese LLR resulted in many problems that have negative to her future financial stability. Anymore, the Chinese LLR also is facing much challenge when China is furthering her open and reform policy. In order to strengthen Chinese financial sector and face the competition, China must reform her Central Bank LLR policy system. So the end of this dissertation analyzes some issues about Chinese effective and new frame of LLR.In short, through this dissertation, we test again that the proper LLR, the publicgoods of financial security net, can make a great role in maintaining financial stability both at domestic and global realm. The LLR lies in the focus of financial security net and we should make use of it as possibly as we can.