At Your Service! Liquidity Provision and Risk Management in 19th Century France
35 Pages Posted: 7 Mar 2019
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: Suggested Citation