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

Vincent Bignon and Maylis Avaro

No 13556, CEPR Discussion Papers from Centre for Economic Policy Research

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: Lender of last resort; Central bank; Discount window; Retail and shadow banks (search for similar items in EconPapers)
JEL-codes: E51 G23 N13 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-rmg
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Citations: View citations in EconPapers (5)

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