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Solutions to the Moral Hazard Problem Arising from The Lender‐of‐last‐resort Facility
Author(s) -
Moore Gregory
Publication year - 1999
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/1467-6419.00090
Subject(s) - moral hazard , lender of last resort , seriousness , morale hazard , economics , actuarial science , finance , hazard , crunch , business , monetary economics , insurance policy , microeconomics , central bank , monetary policy , casualty insurance , political science , incentive , law , risk pool , medicine , physical therapy , chemistry , organic chemistry
The provision of liquid funds via a lender‐of‐last‐resort facility has been the chief means by which governments have chosen to prevent or stay bank runs. The introduction of such a facility, however, leads to a moral hazard problem which weakens each financial manager’s commitment to sound banking, and hence may ultimately make the few bank runs which do occur more dramatic in both size and seriousness. In this paper I provide a survey of the various policy measures which have been proposed to mitigate the effects of the moral hazard problem arising from the introduction of a lender‐of‐last‐resort facility.