Today I would like to review the principles that should govern such lending and then examine some key issues concerning the activities of an international lender of last resort, including which institutions could play this role. How should a lender of last resort operate?
Our understanding of the sources of systemic risk immediately suggests three general principles for operating as an effective lender of last resort: (1) restore confidence in the financial system by quickly providing liquidity, (2) limit moral hazard by encouraging adequate prudential supervision, and (3) act as a lender of last resort infrequently.