The effects of lender of last resort on financial intermediation during the great depression in Japan

The Bank of Japan (BOJ) expanded its liquidity provision in response to a series of financial panics from 1931-1932; however, the BOJ restricted its lending mostly to correspondent banks. We use the BOJ's preferential treatment of correspondent banks as a quasi-experimental setting to examine the impact of central bank lending on financial intermediation. We find that deposits and loans did not fall as fast for correspondent banks as for other banks during the panic period. Furthermore, correspondent banks were less likely to be closed. The results suggest that central banks' liquidity provision plays a critical backstop role during financial stringency.

Automated summary

The study finds that the preferential treatment given to correspondent banks by the Bank of Japan during a series of financial panics helped mitigate the decline in deposits and loans for these banks and reduced the likelihood of their closure. This suggests that central bank liquidity provision plays a critical role during periods of financial stringency.