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.