Working Paper: CEPR ID: DP17831
Authors: Kris Mitchener; Eric Monnet
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
JEL Codes: E44; E58; G01; G32; G33; G38; N14; N24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Personal connections (Z13) | Lending practices (G21) |
| Connected banks (G21) | More liquidity (E41) |
| BdF's governance structure (G30) | Selective lending (G21) |
| Selective lending (G21) | Broader banking crisis (F65) |
| Insufficient lending (G21) | Broader banking crisis (F65) |
| BdF's governance structure (G30) | Financial losses (G33) |
| Selective lending (G21) | Government bailout (H81) |