Connected Lending of Last Resort

Kris James Mitchener and Eric Monnet

No 10226, CESifo Working Paper Series from CESifo

Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.

Keywords: lender of last resort; fiscal backing; central-bank solvency; central-bank design; banking crises; central bank independence; Banque de France; Great Depression (search for similar items in EconPapers)
JEL-codes: E44 E58 G01 G32 G33 G38 N14 N24 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his and nep-mon
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https://www.cesifo.org/DocDL/cesifo1_wp10226.pdf (application/pdf)

Related works:
Working Paper: Connected Lending of Last Resort (2023)
Working Paper: Connected Lending of Last Resort (2023)
Working Paper: Connected Lending of Last Resort (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10226

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