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Working Paper
Restoring confidence in troubled financial institutions after a financial crisis
After an unprecedented number of banks suspended operations in the during Panic of 1893, the head regulator of banks chartered by the United States government allowed about 100 banks to reopen after certifying their solvency. We evaluate whether actions by bank owners to change management, contract with depositors to extend liability maturity structure, write off bad assets, and/or inject capital affected bank survival and deposit retention. This historical episode is particularly informative because there was no expectation of government intervention. We find that contracting with depositors ...
Working Paper
Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock
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 ...
Working Paper
Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907
This paper provides quantitative evidence on the interbank network’s role in transmitting the Panic of 1907 across the United States. Originating in a few New York City banks and trust companies, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of correspondent relationships shows that i) suspensions were more likely in cities whose banks had closer ties to New York, ii) banks with correspondents at the Panic’s center were more likely to close, and iii) banks responded to the panic by rearranging their correspondent relationships, ...
Working Paper
Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907
This paper provides quantitative evidence on the interbank network’s role in transmitting the Panic of 1907 across the United States. Originating in a few New York City banks and trust companies, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of correspondent relationships shows that i) suspensions were more likely in cities whose banks had closer ties to banks at the center of the panic, ii) banks with such links were more likely to close, and iii) banks responded to the panic by rearranging their correspondent relationships, with ...
Working Paper
Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the Early 1900s
Maintaining sufficient liquidity in the financial system is vital for financial stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and ...
Working Paper
Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Congation Risk?
As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the nineteenth century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank system and to correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed?s ...
Journal Article
Furnishing an “Elastic Currency”: The Founding of the Fed and the Liquidity of the U.S. Banking System
This article examines how the U.S. banking system responded to the founding of the Federal Reserve System (Fed) in 1914. The Fed was established to bring an end to the frequent crises that plagued the U.S. banking system, which reform proponents attributed to the nation?s ?inelastic? currency stock and dependence on interbank relationships to allocate liquidity and operate the payments system. Reform advocates noted that banking panics tended to occur at times of the year when the demands for currency and bank loans were normally at seasonal peaks and money markets were at their tightest. ...
Working Paper
Intermediary Asset Pricing during the National Banking Era
Financial intermediary balance sheets matter for asset returns even when these intermediaries do not directly participate in the relevant asset markets. During the National Banking Era, liquidity conditions for the New York Clearinghouse (NYCH) banks forecast excess returns for stocks, bonds, and currencies. The NYCH banks had little to no direct participation in these markets; their main link to these markets was through securities financing. Liquidity conditions affect asset prices through the credit growth of the NYCH banks, which shapes marginal investors' discount rates. I use ...
Working Paper
Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907
This paper provides quantitative evidence on interbank transmission of financial distress in the Panic of 1907 and ensuing recession. Originating in New York City, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of interbank connections show that i) suspension was more likely in cities whose banks had closer ties to banks at the center of the panic, ii) banks with such links were more likely to close in the panic and recession, and iii) banks responded to the panic by rearranging their correspondent relationships, with implications for ...
Working Paper
Interbank Markets and Banking Crises: New Evidence on the Establishment and Impact of the Federal Reserve
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 ...