Supervision without regulation: Discount limits at the Austro–Hungarian Bank, 1909–13

Abstract

AbstractWe show that nineteenth century central banks could use credit limits for discount loans as a means to enforce supervisory standards long before they had any formal regulatory powers. Drawing on novel microdata from the Austro–Hungarian Bank's archives, we document that credit limits were continuously monitored and that their size was contingent on counterparties’ liquidity and capital position. Counterparties had an economic motive to abide by informal prudential ‘rules of the game’: higher credit limits enabled counterparties to streamline their day‐to‐day liquidity management. We exploit the heterogeneous exposure of counterparties to an exogenous liquidity shock to evidence that the Bank relaxed credit limits during crises to fulfil its role as a lender of last resort.