Stopping contagion with bailouts: Micro-evidence from Pennsylvania bank networks during the panic of 1884 |
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| Institution: | 1. Office of Financial Research, U.S. Treasury, 717 14th St NW, Washington, D.C., 20220, United States;2. International Monetary Fund, 700 19th St NW, Washington, D.C., 20431, United States;1. Northeastern University, Boston, MA02186, USA;2. University of California,Riverside, CA92508, USA;3. Securities and Exchange Commission, 44 Montgomery Street, San Francisco, CA94104, USA;1. Graduate School of Business Administration, Fordham University, Room 1319, 1790 Broadway, New York, NY 10023, United States\n;2. Department of Finance, National Chung Hsing University, 250 Kuo-Kuang Road, Taichung 402, Taiwan, ROC\n |
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| Abstract: | Using a newly constructed historical dataset on the Pennsylvania state banking system, detailing the amounts of “due-froms” on a debtor bank-by-debtor bank basis, we investigate the effects of the Panic of 1884 and subsequent private sector-orchestrated bailout of systemically important banks (SIBs) on the broader banking sector. We find evidence that Pennsylvania banks with larger direct interbank exposures to New York City changed the composition of their asset holdings, shifting from loans to more liquid assets and reducing their New York City correspondent deposits in the near-term. Over the long-term though, only the lower correspondent deposits effect persisted. Our findings show that the banking turmoil in New York City impacted more exposed interior banks, but that bailouts of SIBs by the New York Clearing House likely short-circuited a full-scale banking panic. |
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