The Perspective Of Moral Hazard: Rescue Policy Of Lender Of Last Resort

The lender of last resort(LOLR) is the old function of central banks(CBs).Under the background of globalization,unification and deregulation of finance,the financial environment was more complicated than ever,and the degree,extent and depth of systemic risk had surpassed the traditional scope of cognizance.Accordingly,the role of the conventional LOLR has changed more,and the CBs are faced with challenges.The moral hazard is the by-product of rescue policy of LOLR originally.However it has been pendent as yet,so the Basel agreement didn't involve it in 2003.Hence,not only in theory but also in practice,the moral hazard of rescue policy of LOLR is worthy of research.The paper starts with the relation between the run and LOLR,investigates the basic role of LOLR in the elimination of panic runs,and discusses the origins and damages of moral hazard of rescue policy of LOLR.Founded on them,the paper introduces the model of rescue decision-making of LOLR,discusses the influence of moral hazard in the decision-making of CB. The research shows that the likelihood of contagion is the key factor affecting CB's incentive in providing LOLR,while the moral hazard is just of by-product of rescue policy.Based on the policy developed by the model,the paper researches the negative correlation between bank's size and risky action in the rescue policy of "too big to fail".It also employs the method of game to prove that,the strategy of "constructive ambiguity" could affect the strategy choice and restrain the moral hazard.The paper deepens the research of the conclusion of model in the new crises. To accommodate the development of financial market,the rescue policy should not only prevent panic runs but also mitigate moral hazard.The paper applies the research framework of moral hazard to the rescue practice of international and Chinese LOLR.The paper analyzes the feasibility of loan conditionality of IMF and investigates the political economy of selective rescue of IMF.We can find that the rescue policy of IMF is not restrain moral hazard but magnify moral hazard.The dissimilated characteristics of LOLR in China directly induce the severe moral hazard.In order to mitigate the moral hazard of rescue policy of LOLR in China, we should improve institution of LOLR,apply the strategy of "constructive ambiguity" and constitute the affiliated institutions.