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Liquidity creation in the nineteenth century: The role of the clearing houses


Nyborg, Inke (2014). Liquidity creation in the nineteenth century: The role of the clearing houses. - -, University of Zurich.

Abstract

This working paper reports the preliminary results of an effort to analyse under what conditions liquidity can be created in an historic context setting. Starting point is the notion made by Dang, Gorton, and Holmstrom (2012) that symmetric ignorance can create liquidity in money markets under certain circumstances. The authors take as an example the New York clearing house (NYCH) system from 1853 onwards. At times of panic, the intended suppression of bank-specific information by the NYCH avoided the identification of weak banks and thus safeguarded the reputation of all member banks. In addition to the threat of expulsion, one particular successful mechanism that united the banks in the U.S. was the issuance of the clearinghouse loan certificate, a de-facto liability of the clearinghouse. My hypothesis is that a number of critical factors have to be present for the clearing house mechanism to create liquidity. For comparison, I take the example of Switzerland where a clearing house was established in 1876. However, while the Swiss system exhibits many features similar to the NYCH (e.g. threat of expulsion, monitoring), it did not manage to achieve the necessary degree of risk-sharing among its member banks, and its failure became had become aparent by the time of the foundation of the Swiss central bank in 1907.

Abstract

This working paper reports the preliminary results of an effort to analyse under what conditions liquidity can be created in an historic context setting. Starting point is the notion made by Dang, Gorton, and Holmstrom (2012) that symmetric ignorance can create liquidity in money markets under certain circumstances. The authors take as an example the New York clearing house (NYCH) system from 1853 onwards. At times of panic, the intended suppression of bank-specific information by the NYCH avoided the identification of weak banks and thus safeguarded the reputation of all member banks. In addition to the threat of expulsion, one particular successful mechanism that united the banks in the U.S. was the issuance of the clearinghouse loan certificate, a de-facto liability of the clearinghouse. My hypothesis is that a number of critical factors have to be present for the clearing house mechanism to create liquidity. For comparison, I take the example of Switzerland where a clearing house was established in 1876. However, while the Swiss system exhibits many features similar to the NYCH (e.g. threat of expulsion, monitoring), it did not manage to achieve the necessary degree of risk-sharing among its member banks, and its failure became had become aparent by the time of the foundation of the Swiss central bank in 1907.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 June 2014
Deposited On:20 Feb 2015 09:23
Last Modified:05 Apr 2016 18:56
Series Name:-
Number of Pages:14
Related URLs:http://www.bf.uzh.ch/cms/en/centers/zefir.html (Organisation)
Other Identification Number:merlin-id:9789

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