IMF lending and creditor moral hazard

Andrew Haldane and Jörg Scheibe

Bank of England working papers from Bank of England

Abstract: Existing empirical evidence on the effects of IMF intervention on debtor and creditor incentives - so-called moral hazard - is mixed. A new test of creditor moral hazard is developed, which uses some new data and some more stringent identifying restrictions. The test examines the response of the market valuation of UK banks to IMF loan packages. It finds a significant positive response for UK banks, with abnormal returns of over 1% in a number of cases. These excess returns are greater, the larger is the IMF package and the larger is the size of the creditor banks' emerging market portfolio. This effect is significant even once the potentially welfare-enhancing effect of IMF loans in offsetting overpricing problems in international capital markets is controlled for. In short, concrete evidence is found of creditor-side moral hazard associated with IMF support.

Date: 2004-05
New Economics Papers: this item is included in nep-acc, nep-afr, nep-fin, nep-mac and nep-sea
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:216

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