Working Paper

Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock


Abstract: How do banks respond to asset booms? This paper examines i) how U.S. banks responded to the World War I farmland boom; ii) the impact of regulation; and iii) how bank closures exacerbated the post-war bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures experienced larger declines in land prices.

Keywords: Asset booms and busts; banks; bank lending; bank entry; bank closure; deposit insurance; regulation;

JEL Classification: E58; N21; N22;

https://doi.org/10.20955/wp.2017.036

Authors

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2019-06-10

Number: 2017-36

Note: Forthcoming in Journal of Money, Credit, and Banking