The role of the Federal Reserve as an international lender of last resort during the 2007–2008 financial crisis

During the 2007–2008 financial crisis several banking systems suffered shortages in U.S. dollars. The liquidity crisis of these banking systems was overcome thanks to the successful intervention of the Federal Reserve that granted swap lines to several central banks, acting as an international lender of last resort. In this paper we show that the Fed’s intervention was motivated principally by its desire to safeguard the stability of the U.S. banking system. For this reason the Fed’s action was expected by the countries whose banking systems had met with a U.S. dollars shortage. In taking for granted the support of the Fed, the authorities of these countries were affected by forms of ex-ante moral hazard, such as the holding of low amounts of official reserves. Copyright Springer-Verlag Berlin Heidelberg 2015