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Discussion Paper
Banks Runs and Information
The collapse of Silicon Valley Bank (SVB) and Signature Bank (SB) has raised questions about the fragility of the banking system. One striking aspect of these bank failures is how the runs that preceded them reflect risks and trade-offs that bankers and regulators have grappled with for many years. In this post, we highlight how these banks, with their concentrated and uninsured deposit bases, look quite similar to the small rural banks of the 1930s, before the creation of deposit insurance. We argue that, as with those small banks in the early 1930s, managing the information around SVB and ...
Report
Information Management in Times of Crisis
How does information management and control affect bank stability? Following a national bank holiday in 1933, New York state bank regulators suspended the publication of balance sheets of state-charter banks for two years, whereas the national-charter bank regulator did not. We use this divergence in policies to examine how the suspension of bank-specific information affected depositors. We find that state-charter banks experienced significantly less deposit outflows than national-charter banks in 1933. However, the behavior of bank deposits across both types of banks converged in 1934 after ...
Journal Article
Transmission of Sovereign Risk to Bank Lending
Banks hold a significant exposure to their own sovereigns. An increase in sovereign risk may hurt banks' balance sheets, causing a decrease in lending and a decline in economic activity. We quantify the transmission of sovereign risk to bank lending and provide new evidence about the effect of sovereign risk on economic outcomes. We consider the 1999 Marmara earthquake in Turkey as an exogenous shock leading to an increase in Turkey's default risk. Our empirical estimates show that, for banks holding a higher amount of government securities, the exogenous change in sovereign default risk ...
Working Paper
Sovereign Risk and Bank Lending: Theory and Evidence from a Natural Disaster
We quantify the sovereign-bank doom loop by using the 1999 Marmara earthquake as an exogenousshock leading to an increase in Turkey’s default risk. Our theoretical model illustrates that for banks withhigher exposure to government securities, a higher sovereign default risk implies lower net worth andtightening financial constraint. Our empirical estimates confirm the model’s predictions, showing that theexogenous change in sovereign default risk tightens banks’ financial constraints significantly for banks thathold a higher amount of government securities. The resulting tighter bank ...