Working Paper No. 216
By Andrew G Haldane and Jörg Scheibe
Existing empirical evidence on the effects of IMF intervention on debtor and creditor incentives – so-called moral hazard – is mixed. We develop a new test of creditor moral hazard 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 we control for the potentially welfare-enhancing effect of IMF loans in offsetting overpricing problems in international capital markets. In short, we find concrete evidence of creditor-side moral hazard associated with IMF support.