Working Paper: NBER ID: w20083
Authors: Pierrecyrille Hautcoeur; Angelo Riva; Eugene N. White
Abstract: When faced with a run on a "systemically important" but insolvent bank in 1889, the Banque de France pre-emptively organized a lifeboat to ensure that depositors were protected and an orderly liquidation could proceed. To protect the Banque from losses on its lifeboat loan, a guarantee syndicate was formed, penalizing those who had participated in the copper speculation that had caused the crisis bringing the bank down. Creation of the syndicate and other actions were consistent with mitigating the moral hazard from such an intervention. This episode contrasts the advice given by Bagehot to the Bank of England to counter a panic by lending freely at a high rate on good collateral, allowing insolvent institutions to fail.
Keywords: Banque de France; Crisis of 1889; Lender of Last Resort; Moral Hazard; Guarantee Syndicate
JEL Codes: E58; G01; N13; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banque de France's intervention (F33) | prevention of broader banking panic (E44) |
| Banque de France's lifeboat operation (G21) | stabilization of the banking system (G28) |
| formation of guarantee syndicate (G33) | mitigation of moral hazard (G52) |
| penalties imposed on banks (G21) | minimization of moral hazard (G52) |
| penalties imposed on banks (G21) | absence of major crises in France for the next quarter century (N93) |