At Your Service! Liquidity Provision and Risk Management in 19th Century France

35 Pages Posted: 7 Mar 2019

See all articles by Maylis Avaro

Maylis Avaro

Graduate Institute of International and Development Studies (IHEID)

Vincent Bignon

Banque de France

Date Written: February 2019

Abstract

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.

Keywords: central bank, discount window, lender of last resort, Retail and shadow banks

JEL Classification: E51, G23, N13

Suggested Citation

Avaro, Maylis and Bignon, Vincent, At Your Service! Liquidity Provision and Risk Management in 19th Century France (February 2019). CEPR Discussion Paper No. DP13556. Available at SSRN: https://ssrn.com/abstract=3346346

Maylis Avaro (Contact Author)

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Vincent Bignon

Banque de France ( email )

DGEI 49-1430
31 rue Croix des Petits Champs
Paris, 75001
France
+33142924330 (Phone)

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