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Bank failures and the cost of systemic risk: Evidence from 1900 to 1930

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  • Kupiec, Paul H.
  • Ramirez, Carlos D.

Abstract

We measure the effect of bank failures on economic growth using data from 1900 to 1930, a period without active government stabilization policies and several severe banking crises. VAR model estimates suggest bank failures have long-lasting negative effects on economic growth. A bank failure shock involving one percent of system liabilities leads to a 6.5% reduction in GNP growth within three quarters and a measurable reduction for 10 quarters. Panel VAR model estimates for the 48 states show bank failures aggravate commercial non-bank failures. Institutional and regulatory features affect the intensity of the bank failure effect. We find that bank failures have a larger impact in states with deposit insurance, in states more heavily concentrated in agriculture, and in states with fewer large firms. However, because a number of states exhibit all three characteristics, we are not able to clearly identify the true marginal effects of these factors independently.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 22 (2013)
Issue (Month): 3 ()
Pages: 285-307

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Handle: RePEc:eee:jfinin:v:22:y:2013:i:3:p:285-307

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Web page: http://www.elsevier.com/locate/inca/622875

Related research

Keywords: Bank failures; Output growth; Credit channel; Systemic risk; Vector autoregressions; Non-bank commercial failures;

References

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Cited by:
  1. Mark A. Carlson & Jonathan D. Rose, 2011. "Credit availability and the collapse of the banking sector in the 1930s," Finance and Economics Discussion Series 2011-38, Board of Governors of the Federal Reserve System (U.S.).
  2. Abildgren, Kim, 2012. "Business cycles, monetary transmission and shocks to financial stability: empirical evidence from a new set of Danish quarterly national accounts 1948-2010," Working Paper Series 1458, European Central Bank.
  3. Carola Frydman & Eric Hilt & Lily Y. Zhou, 2012. "Economic Effects of Runs on Early 'Shadow Banks': Trust Companies and the Impact of the Panic of 1907," NBER Working Papers 18264, National Bureau of Economic Research, Inc.

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