Working Paper: CEPR ID: DP8362
Authors: Marc Flandreau; Stefano Ugolini
Abstract: In this article, we use the original ledgers of the Bank of England to document which institutions received liquidity during the crisis of 1866. The so-called Overend-Gurney panic is when the Bank began adopting lending of last resort policies (Bignon, Flandreau and Ugolini 2011). We compare 1865 (a 'normal'? year) to 1866. Important findings include: (a) the statistical predominance of foreign bills in the material brought to the Bank of England; (b) the correlation between the geography of bills and British trade patterns; (c) a marked contrast between normal times lending and crisis lending in that main financial intermediaries and the 'shadow banking system'? only showed up at the Bank's window during crises; (d) the importance of money market investors (bills brokers) as chief conduit of liquidity provision in crisis; (e) the importance of Bank of England's supervisory policies in ensuring lending-of-last-resort operations without enhancing moral hazard. These features call for important and interesting parallels with recent policies adopted by the Federal Reserve to deal with the sub-prime crisis.
Keywords: Bagehot; Central Banking; Lending of Last Resort; Shadow Banking System
JEL Codes: G01; G15; N13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Crisis conditions (H12) | Characteristics of institutions receiving liquidity (G21) |
| Crisis conditions (H12) | Type of institutions accessing liquidity (G21) |
| Crisis conditions (H12) | Predominance of foreign bills (F31) |
| Bank's supervisory policies (G28) | Mitigation of moral hazard (G52) |
| Crisis conditions (H12) | Transformation in lending landscape (G21) |