Ugolini, Stefano (2014) Comment on: “Floating a “lifeboat”: The Banque de France and the crisis of 1889” by P.C. Hautcoeur, A. Riva, and E.N. White. Journal of Monetary Economics (65).

Abstract

After the calamitous events of 2007–8, US regulators appear to have taken for granted that central banks׳ “lifeboats” of insolvent financial institutions are necessarily a bad thing. This paper argues that such an assumption might be wrong. According to the authors, it is possible to single out at least one historical episode – the 1889 bailout of Comptoir d׳Escompte (CdE) by Banque de France (BdF) – showing that “good” lifeboats may exist. In their view, this bailout was a success because it allowed for an orderly management of the troubles of a systemically important financial institution (SIFI) while providing the right incentives to prevent the rise of moral hazard.

The authors must be praised for bringing back to our attention this very interesting episode, which is perfectly representative of the difficulties and ambiguities inherent to the evaluation of lifeboats. What do the French events of 1889 actually tell us about this kind of intervention?