Working Paper

Interbank Markets and Banking Crises: New Evidence on the Establishment and Impact of the Federal Reserve

Abstract: This paper examines the impact of the Federal Reserve?s founding on seasonal pressures and contagion risk in the interbank system. Deposit flows among classes of banks were highly seasonal before 1914; amplitude and timing varied regionally. Panics interrupted normal flows as banks throughout the country sought funds from the central money markets simultaneously. Seasonal pressures and contagion risk in the system were lower by the 1920s, when the Fed provided seasonal liquidity and reserves. Panics returned in the 1930s, due in part to shocks from nonmember banks and because the Fed?s decentralized structure hampered a vigorous response to national crises.

Keywords: interbank market; Great Depression; Federal Reserve; banking crises; correspondent banks; contagion; banking panics;

JEL Classification: N21; E58; G21; N22;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2015-11-01

Number: 2015-37

Pages: 9 pages