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Bank failures in banking panics: Risky banks or road kill?

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  • Gerald P. Dwyer, Jr.
  • R.W. Hafer

Abstract

Are banks that fail in banking panics the riskiest ones prior to the panics? The free banking era in the United States provides useful data to examine this question because the assets held by the banks were traded at the New York Stock Exchange. The authors estimate the ex ante riskiness of a bank’s portfolio by examining the portfolio relative to mean-variance frontiers and by examining the bank's leverage and notes relative to assets. The authors find that the ex ante riskiness of a bank’s portfolio helps predict which banks fail and the extent of noteholders’ losses in the event of failure.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2001-13.

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Date of creation: 2001
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Handle: RePEc:fip:fedawp:2001-13

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Keywords: Risk ; Debt ; Bank supervision ; Bank failures;

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References

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  1. Selgin, G.A. & White, L.H., 1993. "How Would the Invisible Hand Handle Money?," Papers 380e, Georgia - College of Business Administration, Department of Economics.
  2. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November.
  3. Gorton, Gary, 1996. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 346-97, April.
  4. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-91, December.
  5. Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 25-46, January.
  6. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, vol. 54(4), pages 361-387.
  7. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-42.
  8. Economopoulos, Andrew J, 1988. "Illinois Free Banking Experience," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 249-64, May.
  9. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-88, May.
  10. Poirier, Dale J., 1980. "Partial observability in bivariate probit models," Journal of Econometrics, Elsevier, vol. 12(2), pages 209-217, February.
  11. Gerald P. Dwyer, Jr., 1996. "Wildcat banking, banking panics, and free banking in the United States," Economic Review, Federal Reserve Bank of Atlanta, issue Dec, pages 1-20.
  12. Economopoulos, Andrew & O'Neill, Heather, 1995. "Bank Entry during the Antebellum Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1071-85, November.
  13. Gerald P. Dwyer, Jr. & Iftekhar Hasan, 1996. "Suspension of payments, bank failures, and the nonbank public's losses," Working Paper 96-3, Federal Reserve Bank of Atlanta.
  14. Gorton, Gary, 1999. "Pricing free bank notes," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 33-64, August.
  15. Meng, Chun-Lo & Schmidt, Peter, 1985. "On the Cost of Partial Observability in the Bivariate Probit Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 71-85, February.
  16. Economopoulos, Andrew J., 1990. "Free bank failures in New York and Wisconsin: A portfolio analysis," Explorations in Economic History, Elsevier, vol. 27(4), pages 421-441, October.
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Cited by:
  1. Niinimäki, Juha-Pekka, 2002. "Bank panics in transition economies," BOFIT Discussion Papers 2/2002, Bank of Finland, Institute for Economies in Transition.
  2. Gerald P. Dwyer, Jr. & Margarita Samartín, 2006. "Why do banks promise to pay par on demand?," Working Paper 2006-26, Federal Reserve Bank of Atlanta.

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