Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271870 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10226
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
lender of last resort
fiscal backing
central-bank solvency
central-bank design
banking crises
central bank independence
Banque de France
Great Depression
JEL: 
E44
E58
G01
G32
G33
G38
N14
N24
Document Type: 
Working Paper
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