Predicting the Past: Understanding the Causes of Bank Distress in the Netherlands in the 1920s
AbstractWhy do some banks fail in financial crises while others survive? This paper answers this question by analysing the consequences of the Dutch financial crisis of the 1920s for 143 banks, of which 37 failed. Banks’ choices in balance sheet composition, corporate governance practices and shareholder liability regimes were found to have a significant impact on their chances of experiencing distress. Banks bore a higher probability of failing if, on the eve of the crisis, they: were highly performing; were highly leveraged; had fewer interlocking directorates with non-banks; and concentrated their managerial interlocks with highly profitable banks. Banks which chose to adopt shareholder liability regimes with unpaid capital were more likely to experience distress, but could mitigate this risk by keeping higher portions of their equity unpaid. Receiver operating characteristic analysis shows that interlock characteristics in particular have a high predictive power.
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Bibliographic InfoPaper provided by European Historical Economics Society (EHES) in its series Working Papers with number 0035.
Length: 50 pages
Date of creation: Jan 2013
Date of revision:
financial crises; bank failures; interlocking directorates; shareholder liability; the Netherlands; the interwar period;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-03 (All new papers)
- NEP-HIS-2013-02-03 (Business, Economic & Financial History)
- NEP-RMG-2013-02-03 (Risk Management)
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