Maijoor: 1763 crisis highlights central bank readiness
Steven Maijoor of De Nederlandsche Bank drew lessons from the 1763 Amsterdam financial crisis to emphasize the central bank's role as lender of last resort. He stressed the importance of operational readiness and cross-border cooperation for financial stability.
Amsterdam's 1763 credit crunch
The 1763 crisis, one of the first cross-border financial crises, began with the bankruptcy of prominent Amsterdam banker Leendert Pieter de Neufville.
His highly leveraged speculative grain deal failed after the Seven Years' War ended and grain prices collapsed by over 75 percent.
This triggered a classic credit crunch, leading to immediate bank failures in Amsterdam and subsequently in Hamburg, which then caused a new wave of failures in Amsterdam.
The crisis ingredients included leverage, maturity mismatch, complex products, and interconnectedness, culminating in a liquidity squeeze, fire sales, and collapsing asset prices.
Crucially, there was no coordinated public intervention or effective lender of last resort, ultimately plunging Prussia into a deep and long-lasting recession.
Much of this historical account is derived from a 2003 article by Hyun Song Shin and Isabel Schnabel.
Modern ELA: Tools are not enough
Emergency liquidity assistance (ELA) would have certainly helped in the 1763 crisis, especially if coordinated cross-border.
However, having the tools is not enough; banks must also be ready to use them, as the events of 2023 reminded us.
In both the Silicon Valley Bank and Credit Suisse cases, operational readiness was an issue.
The Swiss National Bank had to provide ELA to Credit Suisse based on a government guarantee because Credit Suisse was unable to post sufficient collateral in time.
This highlights the importance of collateral prepositioning.
A strict prepositioning requirement could increase resilience but at the cost of flexibility, potentially shifting the central bank from a lender of last resort to a lender of first resort.
The BCBS conducted a stock-taking exercise on operational readiness and prepositioning, revealing that banks in various countries, including US banks with $1 trillion, are already voluntarily prepositioning collateral for contingency reasons.
Stigma and the call for readiness
A key challenge is the misperception that using central bank operations in normal situations signals weakness, creating market stigma.
Supervisors and central banks must clearly communicate that regular refinancing operations are a routine and integral component of banks' day-to-day liquidity management.
The 1763 story serves as a stark reminder of the consequences of fragile, interconnected financial systems without crisis coordination.
Today, the financial system is in a much stronger position, with committees like the ECB's Market Operations Committee playing a vital role in ensuring readiness for future moments of stress.