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The Effects of Reconstruction Finance Corporation Assistance on Michigan’s Banks’ Survival in the 1930s

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  • Charles W. Calomiris
  • Joseph R. Mason
  • Marc Weidenmier
  • Katherine Bobroff

Abstract

This paper examines the effects of the Reconstruction Finance Corporation’s (RFC) loan and preferred stock programs on bank failure rates in Michigan during the period 1932-1934, which includes the important Michigan banking crisis of early 1933 and its aftermath. Using a new database on Michigan banks, we employ probit and survival duration analysis to examine the effectiveness of the RFC’s loan program (the policy tool employed before March 1933) and the RFC’s preferred stock purchases (the policy tool employed after March 1933) on bank failure rates. Our estimates treat the receipt of RFC assistance as an endogenous variable. We are able to identify apparently valid and powerful instruments (predictors of RFC assistance that are not directly related to failure risk) for analyzing the effects of RFC assistance on bank survival. We find that the loan program had no statistically significant effect on the failure rates of banks during the crisis; point estimates are sometimes positive, sometimes negative, and never estimated precisely. This finding is consistent with the view that the effectiveness of debt assistance was undermined by some combination of increasing the indebtedness of financial institutions and subordinating bank depositors. We find that RFC’s purchases of preferred stock – which did not increase indebtedness or subordinate depositors – increased the chances that a bank would survive the financial crisis. We also perform a parallel analysis of the effects of RFC preferred stock assistance on the loan supply of surviving banks. We find that RFC assistance not only contributed to loan supply by reducing failure risk; conditional on bank survival, RFC assistance is associated with significantly higher lending by recipient banks from 1931 to 1935.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18427.

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Date of creation: Sep 2012
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Handle: RePEc:nbr:nberwo:18427

Note: CF DAE ME
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  1. Money for Nothing? Banking Failure and Public Funds in Michigan in the early 1930s
    by sebastianfleitas in NEP-HIS blog on 2012-10-19 13:23:30

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