Working Paper: CEPR ID: DP16841
Authors: Kilian Rieder; Clemens Jobst
Abstract: We show that European central banks used credit limits for discount loans as a means to enforce supervisory standards long before they had any formal regulatory powers. Drawing on novel micro data from the Austro-Hungarian Bank's archives, we document that credit limits were continuously monitored and that their size was contingent on counterparties' liquidity and capital position. Counterparties had an incentive-compatible economic motive to abide by informal prudential "rules of the game": higher credit limits enabled counterparties to streamline their day-to-day liquidity management. We exploit the heterogeneous exposure of counterparties to an exogenous liquidity shock to evidence that the Bank relaxed credit limits during crises to fulfill its role as a lender of last resort.
Keywords: lender of last resort; banking regulation; central bank lending; liquidity crisis; credit limits
JEL Codes: E58; G28; N13; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit limits (G21) | Counterparty behavior (D16) |
| Higher credit limits (G51) | Adherence to informal prudential rules (G28) |
| Liquidity and capital positions (G33) | Credit limits (G21) |
| Exogenous liquidity shocks (F41) | Relaxation of credit limits (G21) |
| Poor fundamentals (D29) | Enforcement of strict resolution regime (G33) |
| Liquidity ratios (G33) | Credit limits (G21) |
| Leverage ratios (G32) | Credit limits (G21) |