DP16841 Supervision without Regulation: Discount Limits at the Austro-Hungarian Bank, 1909-1913

Author(s): Clemens Jobst, Kilian Rieder
Publication Date: December 2021
Date Revised: March 2022
Keyword(s): banking regulation, central bank lending, credit limits, lender of last resort, Liquidity Crisis
JEL(s): E58, G28, N13, N23
Programme Areas: Financial Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16841

We show that European central banks used credit limits for discount loans as a means to enforce supervisory standards long before they had any formal regulatory powers. Drawing on novel micro data from the Austro-Hungarian Bank's archives, we document that credit limits were continuously monitored and that their size was contingent on counterparties' liquidity and capital position. Counterparties had an incentive-compatible economic motive to abide by informal prudential "rules of the game": higher credit limits enabled counterparties to streamline their day-to-day liquidity management. We exploit the heterogeneous exposure of counterparties to an exogenous liquidity shock to evidence that the Bank relaxed credit limits during crises to fulfill its role as a lender of last resort.