Working Papers, Department of Economics, Rutgers, The State University of New Jersey 2014-05
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.