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Bank Networks and Systemic Risk: Evidence from the National Banking Acts

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  • Mark Paddrik

    (Office of Financial ResearchAuthor-Name: Haelim Park
    Office of Financial Research)

  • Jessie Jiaxu Wang

    (Arizona State University)

Abstract

The reserve requirements established by the National Banking Acts (NBAs) dictated the amounts and locations of interbank deposits, thereby reshaping the structure of U.S. bank networks. Using unique data on bank balance sheets, along with detailed interbank deposits in 1862 and 1867 in Pennsylvania, we study how the NBAs changed the bank network structure. Further, we quantify the effect on financial stability in a model of interbank networks with liquidity withdrawal. We find that the NBAs led to a concentration of interbank deposits at both the city and the bank level, creating systemically important banks in major financial centers. Our quantitative results show that the newly emerged system was "robust-yet-fragile" -- while the concentration of linkages made the system more resilient in general, it increased the likelihood of contagion when financial center banks faced large shocks.

Suggested Citation

  • Mark Paddrik & Jessie Jiaxu Wang, 2016. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," Working Papers 16-13, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:16-13
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank networks; financial interconnectedness; systemic risk; contagion; liquidity withdrawal; the National Banking Acts;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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