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Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk

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Author Info

  • Charles W. Calomiris

    (Columbia University, American Enterprise Institute, and National Bureau of Economic Research)

  • Berry Wilson

    (Pace University)

Abstract

We model the trade-off between low-asset risk and low leverage to satisfy preferences for low-risk deposits and apply it to interwar New York City banks. During the 1920s, profitable lending and low costs of raising capital produced increased bank asset risk and increased capital, with no deposit risk change. Differences in the costs of raising equity explain differences in asset risk and capital ratios. In the 1930s, rising deposit default risk led to deposit withdrawals. In response, banks increased riskless assets and cut dividends. Banks with high default risk or high costs of raising equity contracted dividends the most.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 77 (2004)
Issue (Month): 3 (July)
Pages: 421-456

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Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:3:p:421-456

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Crafts, Nicholas; Fearon, Peter, 2010. "Lessons from the 1930s' Great Depression," CAGE Online Working Paper Series 23, Competitive Advantage in the Global Economy (CAGE).
  2. Ines Drumond & José Jorge, 2009. "Basel II Capital Requirements, Firms' Heterogeneity, and the Business Cycle," FEP Working Papers 307, Universidade do Porto, Faculdade de Economia do Porto.
  3. Michael D. Bordo & Joseph G. Haubrich, 2009. "Credit crises, money, and contractions: A historical view," Working Paper 0908, Federal Reserve Bank of Cleveland.
  4. Oren Levintal, 2012. "Equity Capital, Bankruptcy Risk and the Liquidity Trap," Working Papers 2012-07, Department of Economics, Bar-Ilan University.
  5. Bernstein, Asaf & Hughson, Eric & Weidenmier, Marc D., 2010. "Identifying the effects of a lender of last resort on financial markets: Lessons from the founding of the fed," Journal of Financial Economics, Elsevier, vol. 98(1), pages 40-53, October.

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