Discussion paper

DP13556 At Your Service! Liquidity Provision and Risk Management in 19th Century France

This paper uses a historical study to show a solution to the trade-off faced by central banks between providing liquidity to a broad group of financial intermediaries and the risk that this easy access may fuel moral hazard. In late 19th century the Bank of France operated a very wide discount window and used a variety of risk management techniques to effectively subdue risk-taking behaviors and to protect its balance sheet from taking any loss. This allowed agents to monetize a very diverse set of capital while limiting the risk of bail-out. We show that this effectively helped the central bank to stabilize the economy from the consequences of negative income shocks.

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Citation

Avaro, M and V Bignon (2019), ‘DP13556 At Your Service! Liquidity Provision and Risk Management in 19th Century France‘, CEPR Discussion Paper No. 13556. CEPR Press, Paris & London. https://cepr.org/publications/dp13556