Amsterdam banking crisis of 1763
The Amsterdam banking crisis of 1763 in the Netherlands followed the end of the
Background
On 10 February 1763, the
Some Amsterdam merchant bankers were leveraged far beyond their capacity. Financial activity in late-eighteenth-century Amsterdam was controlled by a group of merchant banking firms. These “bankers” were proprietary firms that dealt in trade goods and that also provided financing to other merchants. These firms were not deposited banks in the English conventional tradition, as
Merchant bankers believed that their balance sheet growth and leverage were hedged and insured through offsetting claims and liabilities. And while some of the more conservative Dutch bankers were wary in growing their wartime business, others expanded quickly. One of the fastest-growing merchant banks belonged to the De Neufville brothers, who speculated in depreciating currencies and endorsed a large number of bills of exchange. Leendert Pieter de Neufville was the leading perpetrator of the proliferation of the faulty bills of exchange. Noting his success, other merchant bankers followed suit.
On 19/20 April
On 12 April 1763, Frederick decided to dump his unused wartime grain supplies in
When Leveaux and Von Stein dropped out of the grain deal it must have come as a shock to De Neufville and Gotzkowsky. The restructuring of the Gotzkowsky deal put tremendous pressure on De Neufville, who then became responsible for 3/5 of the deal. Gotzkowsky had lent at least two million
The failure of a firm of De Neufville’s size – almost half as large as the Bank of Amsterdam itself – shocked the markets. The immediate victims were a group of firms known as “cashiers.” The cashiers were about 30–40 financial intermediaries whose activities formed a bridge between the large banks and merchants. Traditionally, the cashiers had served as brokers in the market for bank funds. By the last half of the eighteenth century, their activities had expanded to include the settlement of bills denominated in current guilders, deposit taking, and even the issue of cashier’s receipts that circulated locally as banknotes. The cashiers were run hard during the first days of the crisis, as panicked holders of cashier’s receipts demanded coin from the issuers. The contraction of the bill market put the Amsterdam merchant bankers under heavy pressure, as their ability to roll over funding was several constricted.
Policy response
The post-Neufville credit freeze-up ultimately forced 38 Amsterdam firms into bankruptcy during August and September 1763. Compared to Neufville, however, these were small enterprises, and many were able to reopen within a few months, after settling with creditors. By October, there are signs of the market returning to a more “normal” state, albeit at lower levels of activity than before. Scholars argue that a major reason for the comparatively mild impact of the panic in Amsterdam was the provision of liquidity through the Bank of Amsterdam, which was able to compensate for a shortage of market liquidity. This was accomplished by two methods: the first being the traditional repo window for trade coins. The second was the novel idea of a repo window for unminted silver bullion (the bullion window was authorized on 4 August).
Coin deposits at the Bank of Amsterdam functioned much as modern central bank repurchase transactions. Differently from the usual practice of modern central banks, however, the Bank did not try to actively vary the terms of its coin window. Nor did it attempt to manage the number of receipts outstanding, but simply allowed these to adjust to market conditions. Thus, when Neufville collapsed, bankers, to maintain their overall balances, created two million new bank guilders by bringing coin collateral into the bank.
The second operation used to restore damages from the Neufville failure was the bullion window. In short, the policy dilemma facing the Bank of Amsterdam in 1763 an extraordinary demand for central bank balances, combined with a surfeit of collateral, only most of it not eligible for transactions with the central bank. Thus, the improvised solution was for the Bank to expand its repo window to include unminted bullion. In designing this program, a key political constraint was that the bank did not undercut the business of the mints, a major source of governmental revenue. Combined, these two solutions helped curb the effects of the failure of the de Neufville banking house.
Overall there were many lessons learned by the Crisis. A combination of the system including the securitization of numerous embedded liabilities, a large shock to collateral values, and erratic policy decisions all came together to produce the Crisis. The trigger is provided by the collapse of the Neufville bank, which was too “interconnected to fail.” The solution of providing unlimited amounts of liquidity (coin repo window), on fixed terms, was a brilliant strategy and one that would be replicated during the 2008 Crisis. As well, the bullion window, though used lightly, was effective for its limited purpose. These two liquidity measures dually prevented additional failures of major market participants.
References
- ^ a b Narron, James, and David Skeie. "Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market."
- ^ Lessons from the Seven Years War by Isabel Schnabel and Hyun Song Shin
- ^ Quinn, Stephen, and Williams Roberds. "Responding to a Shadow Banking Crisis: The Lessons of 1763."
- .
- ^ E. Ris, p. 37-38, 54; H. Rachel & P. Wallich, p. 448
- ISBN 9783110948554.
- ^ J.E. Gotzkowsky, p. 153, W.O. Henderson (1963), p. 55
- ^ E. Ris, p. 39
- ^ N. Schepkowski, p. 341
- ^ Schlesische Privilegirte Staats - Kriegs - und Friedens-Zeitungen. 1763-04-16 [Jg.22 No. 44]
- ^ I. Lazcano, p. 7
- ^ S. Quinn & W. Roberds (2012), Responding to a Shadow Banking Crisis: The Lessons of 1763, p. 16; I. Schnabel & H.S. Shin (2001), p. 15
- ^ E. Ris, p. 45-46
- ^ E. Ris, p. 47
- ^ E. Ris, p. 38, 39, 45, 54, 56, etc
- ^ Seyfart, Johann Friedrich (1765). "Der Geschichte des Seit 1756 in Deutschland und Dessen Angranzenden Landern Gefuhrten Kriegs".
- ^ N. Schepkowski, pp. 340-343
- ^ J.E. Gotzkowsky, p. 147-150
Sources
- "The Amsterdam Banking Crisis of 1763." The Amsterdam Banking Crisis of 1763. N.p., n.d. Web. 23 Apr. 2014.
- Jong-Keesing, Elisabeth Emmy de "De Economische Crisis van 1763 te Amsterdam". Internationale Uitgevers- en Handelmaatschappij, Amsterdam (1939): n. pag. Web.
- ISBN 978-1408868560.
- Narron, James, and David Skeie. "Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market." Liberty Street Economics. Federal Reserve Bank of New York, 7 Feb. 2014. Web. 23 Apr. 2014.
- Quinn, Stephen, and Williams Roberds. "Responding to a Shadow Banking Crisis: The Lessons of 1763." Texas Christian University, Department of Economics (2012): n. pag. Print.
- "Shadow Banking Crisis of 1763. Amazing Similarities with Lehman Crisis of 2008." Mostly Economics. N.p., n.d. Web. 23 Apr. 2014.