Abstract 

Using previously unknown, hand-collected central bank data on daily discount window lending, we show that, during the worst banking crisis in French history (1930-1931), France’s central bank secretly lent 30–40% more to connected banks – commercial banks whose board members were voting shareholders of the central bank. The central bank did not pursue a classic lender of last resort policy response to contagious bank runs such as lending broadly to banks in need of liquidity. Instead, it prioritized shareholder value. However, connected commercial banks, on average, performed no better during the panic of 1930-31, in terms of either retaining deposits or survival. Our results are consistent with theories arguing that, without broad-based emergency lending, a LOLR cannot arrest a panic: connected banks did not escape the crisis because connected lending by the central bank failed to prevent negative spillovers. Despite initially lending in a connected fashion to prevent losses on its portfolio, the central bank ended up with massive losses on its loan book due to crisis-period lending, leading to a surreptitious government bailout of the central bank that was only revealed to the public months after the fact. Our analysis shows that, in case of connected central bank emergency lending, neither the borrowers nor the lender comes out ahead.

Paper can be downloaded here.

Practicalities

This event will be held in person. The seminar will take place in Roeterseiland campus (REC) building M, room number M4.02.  

About the speaker 

Eric Monnet is Director of Studies at EHESS and Professor at the Paris School of Economics. He has published books and articles on the history of the international monetary system, public debt, banking crises, credit and the financing of long-term investment. His work also focuses on the history and current issues of central bank policies. Recent book: Balance of Power. Central Banks and the Fate of Democracies (Chicago, 2024).

About ACLE

The Amsterdam Center for Law and Economics (ACLE) is a joint initiative of the Faculty of Economics and Business and the Faculty of Law at the University of Amsterdam. The objective of the ACLE is to promote high-quality interdisciplinary research at the intersection between law and economics.