How to stabilize the banking system: Lessons from the pre-1914 London money market

Sissoko, Carolyn

Abstract

Copyright © European Association for Banking and Financial History e.V. 2016. This article argues that the British financial system in the era prior to World War I provides modern policymakers with a successful model of how to stabilize the banking system. This model had two components: incentives were structured to ensure that all banks that originated or traded assets on the money market sought only to trade in high-quality assets; and macro-prudential regulation promoted the segregation of money markets from capital markets, monitored the growth of money market credit, and restricted trade on the money market in assets issued by entities and sectors whose money market liabilities were growing so fast that the most reasonable explanation was that the money market was being used to finance longer-term investment. These facts indicate that policymakers can successfully stabilize the banking system through a combination of structural reform and regulation of the growth of credit.

• Journal Article Type: Article
• Acceptance Date: Dec 27, 2015
• Online Publication Date: Mar 21, 2016
• Publication Date: Apr 1, 2016
• Deposit Date: Oct 17, 2019
• Publicly Available Date: Oct 18, 2019
• Journal: Financial History Review
• Print ISSN: 0968-5650
• Electronic ISSN: 1474-0052
• Publisher: Cambridge University Press (CUP)
• Peer Reviewed: Peer Reviewed
• Volume: 23
• Issue: 1
• Pages: 1-20
• DOI: https://doi.org/10.1017/S0968565016000020
• Keywords: prime bank bills, commercial bills, real bills, safe assets, macro-prudential regulation, financial stability, discount policy, London money market, central banking, Bank of England
• Public URL: https://uwe-repository.worktribe.com/output/3868127
• Publisher URL: https://doi.org/10.1017/S0968565016000020