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.
