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This paper provides an introduction to the special issue on international lending of last resort. Starting from debates about rescue operations and unconventional policies of major central banks in the contexts of the Global Financial Crisis and the European Debt Crisis, it draws attention to recurring controversies about trade-offs between averting critical contagion in financial markets and avoiding moral hazard. The need for international lending of last resort in strongly interconnected financial systems is more than ever evident, but there is no clear consensus on how to manage it. The contributions to this special issue put relevant issues in historical and theoretical perspectives.

This article examines the monetary arrangements between Australia, New Zealand and the United Kingdom from the 1820s to the 1930s. It is argued that the three countries formed a monetary union for most of this period. A new analysis of inland and London exchange rates demonstrates that the union achieved a high degree of uniformity and stability, and that an international branch network of competing, private banks could successfully integrate vastly different geographic and economic areas. It is shown that the union’s break-up in the 1930s was the result of a political decision to create separate and devalued Australian and New Zealand currencies in order to mitigate some of the impacts of the Great Depression. International lending of last resort only played a limited role and helped to fix exchanges between the newly separated currencies after 1932.

The Latin Monetary Union (hereafter LMU) was established in 1865 between France, Italy, Belgium and Switzerland. The agreement provided for the adoption of a common monetary base consisting of specie, and the adoption of the free circulation of gold and silver coins among them, whatever the issuing country. Despite its original goal, the minting of silver coins was subject to numerous restrictions (especially between 1874 and 1876) before being fully suspended by article nine of the convention of November 5th 1878. The necessity for a lender of last resort quickly appeared in practice, even though the 1865 convention, and its numerous amendments, did not mention it in theory. The present article looks at how the idea of the lender of last resort was discussed in the context of the Latin Monetary Union. Specifically, it focuses on two opposing views on the LMU and its problems, as adopted by French economists at the time. The article concludes that the Banque de France played a crucial role in safeguarding the LMU. Referring to Bordo’s 1990 typology of lenders of last resort, we also add a fifth type, that of converter of last resort, to characterise the specific role played by the Banque de France.

We describe a simple model in which banks’ prudential efforts and public regulation can reduce the probability of bankruptcy. Focusing on the European example, we contrast the national case with an integrated banking market and find that banks will exert, and public regulators will demand, greater prudential effort to monitor their bank’s activities. Thus, financial integration may increase voluntary prudential behavior by banks, avoid a regulatory “race to the bottom,” and improve the soundness of the financial system. Along similar lines, we show that the absence of a dedicated lender of last resort within the euro area can reduce the probability of financial crisis. Despite these findings, the overall level of regulatory activity may remain suboptimal from a European perspective. We also discuss incentives for European banks to organize their foreign holdings in branches or subsidiaries. [ABSTRACT FROM AUTHOR]