Discussion paper

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

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.

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Citation

Rieder, K and C Jobst (eds) (2022), “DP16841 Supervision without Regulation: Discount Limits at the Austro-Hungarian Bank, 1909-1913”, CEPR Press Discussion Paper No. 16841. https://cepr.org/publications/dp16841