Central Bank Liquidity Support, Bank Lending, and the End of Currency Competition

Anna Grodecka-Messi () and Xin Zhang ()
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Anna Grodecka-Messi: Financial Stability Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Xin Zhang: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 454, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: Private money creation lies at the heart of currency competition due to seigniorage rents that are an important contributor to banks’ franchise values. However, it undermines the role of central bank in money provision and has been historically a contentious issue. As shifting from private to public money may come at a cost of bank disintermediation and affect economic growth, such a swap should be well-planned to minimize its costs. In this paper, we study the transition from private to public money in a historical context. The 1897 banking law in Sweden granted the banknote monopoly to the Swedish central bank. To facilitate the shift, the central bank provided preferential liquidity support to formerly note-issuing private banks. Drawing on newly digitized monthly archival data, we show that this liquidity provision played a critical role in shaping private banks’ performances during the transition. Once the support started being withdrawn, affected banks experienced a 23% drop in profitability. No signs of bank disintermediation are found.

Keywords: Money and Banking; Inside Money; Outside Money; Bank Profitability; Bank Lending; Banknote Monopoly (search for similar items in EconPapers)
JEL-codes: E42 E50 G21 G28 N23 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2025-08-01
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-his, nep-mon and nep-pay
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