Lloyd's Maritime and Commercial Law Quarterly
Emergency liquidity financing for banks in distress: a legal framework for developing countries
Andrew Campbell *
This article examines the provision of emergency liquidity financing by central banks (often referred to as “lender of last resort”) to banks which are experiencing financial difficulties. It considers such matters as, the causes of banking crises, the need for confidence in individual banks and the banking system, the types of financial support which can be used, the role of the central bank and the historical and theoretical basis of emergency liquidity financing. The final part of the article considers the need for a legal framework for emergency liquidity financing and provides some proposals for the design of a suitable legal framework for use in developing countries.
“Lend freely at a high rate against good collateral”
1
Introduction
This article considers some of the issues surrounding the role of central banks in the prevention and control of banking crises by the provision of emergency liquidity financing to banks which are experiencing financial difficulties.2
This has been a matter of considerable importance in the last quarter of a century as a result of the number of serious
* Reader in International Business Law, School of Law, University of Leeds (e-mail:
a.campbell@leeds.ac.uk
). This article is an expanded and updated version of a paper presented to the Banking and Finance Subject Section at the Society for Legal Scholars Annual Conference at the University of Sheffield, September 2004. The impetus for the paper was work undertaken by the author as Consulting Counsel to the Legal Department of the International Monetary Fund (IMF) in advising several developing and transitional countries on the development of new banking laws. Much of the research was undertaken at the IMF. I am indebted to Ross Delston for giving me the benefit of his extensive expertise on this subject. I would like to give thanks to Peter Cartwright of the University of Nottingham and Jenny Hamilton of Strathclyde University. The views expressed in this article are those of the author in a personal capacity.
1. Walter Bagehot, Lombard Street: A Description of the Money Market
(London, 1873) (hereafter “Bagehot”), 106.
2. This article considers certain aspects of this issue only. For other relevant reading see D He, Emergency Liquidity Support Facilities
: International Monetary Fund Working Paper 00/79 (Washington, 2000); R Delston and A Campbell, “Emergency Liquidity Financing by Central Banks: Systemic Protection or Bank Bailout”, in Current Developments in Monetary and Financial Law
, Vol. 3
(Washington, 2005), 429 (hereafter “Delston & Campbell”); C Goodhart and G Illing (eds), Financial Crises, Contagion and the Lender of Last Resort
(Oxford, 2002) (hereafter “Goodhart & Illing”) (this edited collection contains valuable information on the use of lender of last resort operations and also on the ways in which such financial assistance is provided by central banks; it is also very useful for information on the operational effectiveness of such financing); R Lastra, “Lender of Last Resort: an International Perspective” [1999] ICLQ 340.
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