DP13556 At Your Service! Liquidity Provision and Risk Management in 19th Century France
|Author(s):||Maylis Avaro, Vincent Bignon|
|Publication Date:||February 2019|
|Keyword(s):||central bank, discount window, lender of last resort, Retail and shadow banks|
|JEL(s):||E51, G23, N13|
|Programme Areas:||Economic History|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13556|
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.