Weber attacks international financial safety net concept

Axel Weber, the former president of the Bundesbank, on Monday warned against replacing ad hoc swap lines with a more permanent liquidity mechanism headed by the International Monetary Fund (IMF), saying it risked creating further moral hazard.

At his Per Jacobsson Foundation Lecture entitled: 'The IMF and the International Monetary System: Lessons from the Crisis', delivered in Washington, DC, Weber said central banks' reaction to the systemic crisis had been "swift" and "well co-ordinated", and that enabling the IMF to offer near-unlimited amounts of short-term liquidity would implicitly require a pre-commitment from central banks to cover its potential financing needs in times of stress. "Such a commitment seems undesirable and unrealistic, not least considering the resulting unwarranted interference with members' monetary policy as well as moral hazard issues."

Weber said the "case-by-case" approach adopted by central banks provided flexibility and reduced the incentive for risky behaviour, as banks did not expect to be bailed out in any case. He said unlike central banks, the IMF was not a "world central bank" or a "lender of last resort", and therefore it can not and should not be a "hub" for central bank swap lines.

During the recent financial crisis, a number of major central banks launched temporary swap lines to provide foreign liquidity to banks in money markets that had dried up. To counter this liquidity squeeze, central banks introduced ad hoc swap lines with other central banks as an emergency measure. However, there have been recent discussions to create a permanent swap agreement. A paper recently published by the Centre for Economic Policy Research recommended that a "star-shaped" structure of swap lines be created between central banks that centred around the IMF. The paper argued that this would make the system more efficient.

However, Weber said he was not convinced of the need to again change facilities and provide the IMF with quasi-unlimited and unconditional "short-term liquidity lines", as this would rely on access to reserve currency central banks. "To me, it seems questionable whether a 'structured' or standardised approach to global financial safety nets makes sense compared with a more flexible case-by-case approach, which has proven very effective in the recent crisis."

Weber resigned from his role as head of the Bundesbank in March, following a disagreement with his colleagues on the European Central Bank's Governing Council over its Securities Markets Programme. Weber, who is now a professor at the University of Chicago, is set to become chairman of UBS in 2013. However, there are reports he may join the Swiss banking group sooner than anticipated, after it was hit by a trading scandal last week.