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

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  • Sissoko, Carolyn

Abstract

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.

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  • Sissoko, Carolyn, 2016. "How to stabilize the banking system: lessons from the pre-1914 London money market," Financial History Review, Cambridge University Press, vol. 23(1), pages 1-20, April.
    • Handle: RePEc:cup:fihrev:v:23:y:2016:i:01:p:1-20_00
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    Cited by:

    1. Carolyn Sissoko, 2017. "The Plight of Modern Markets: How Universal Banking Undermines Capital Markets," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 46(1), pages 53-104, February.
    2. Carolyn Sissoko, 2021. "Modern Legal Practice as the Engine of Inequality," Development and Change, International Institute of Social Studies, vol. 52(1), pages 192-201, January.
    3. Carolyn Sissoko, 2022. "Becoming a central bank: The development of the Bank of England's private sector lending policies during the Restriction," Economic History Review, Economic History Society, vol. 75(2), pages 601-632, May.

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