Interbank connections,contagion and bank distress in the Great Depression? |
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| Institution: | 1. Columbia University, National Bureau of Economic Research (NBER), United States;2. Utah State University, National Bureau of Economic Research (NBER), United States;3. Federal Reserve Bank of St. Louis, United States;1. Department of Economics University of Birmingham, United Kingdom;2. Department of Economics Carleton University, United Kingdom;1. Audencia Business School, 8 rue de la Jonelière, 44312 Nantes, France;2. TBS Business School, 1 place Alfonse Jourdain, 31068 Toulouse, France;3. Ghent University, Department of Financial Economics, Sint-Pietersplein 5, 9000 Ghent, Belgium;1. University of San Diego School of Business, San Diego, CA 92110 US |
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| Abstract: | Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were vulnerable to closures of their correspondents and their respondents. Further, banks were less responsive to network liquidity risk in their management of cash and capital buffers after the Federal Reserve was established, suggesting that banks expected the Fed to reduce that risk. The Fed's presence weakened incentives for the most systemically important banks to maintain capital and cash buffers against liquidity risk, and thereby likely contributed to the banking system's vulnerability to contagion during the Depression. |
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