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Correspondent banking, systematic risk, and the Panic of 1893

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  • Cotter, Christopher
  • Rousseau, Peter L

Abstract

During the U.S. National Banking Period (1863-1913), a network of correspondent banking relationships left the nation vulnerable to systemic risks, bank failures, and financial panics. We use comprehensive data on primary correspondent relationships for all national, state, savings, and private banks in the lead up to the Panic of 1893 to show that failures of both upstream and downstream correspondents increased the likelihood that a given bank would itself fail, and that these effects varied over the course of the Panic. Members of the New York Clearinghouse, despite a very low incidence of actual failure, also saw significant weakening of their balance sheets early in the Panic when their downstream respondents failed, and falling stock prices throughout the disruption. The results demonstrate a two-way system-wide weakness of the correspondent system that the Federal Reserve Act of 1914 presumably sought to remedy.

Suggested Citation

  • Cotter, Christopher & Rousseau, Peter L, 2022. "Correspondent banking, systematic risk, and the Panic of 1893," MPRA Paper 113340, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113340
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    References listed on IDEAS

    as
    1. Haelim Anderson & Mark Paddrik & Jessie Jiaxu Wang, 2019. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," American Economic Review, American Economic Association, vol. 109(9), pages 3125-3161, September.
    2. Rousseau, Peter L., 2011. "The Market for Bank Stocks and the Rise of Deposit Banking in New York City, 1866–1897," The Journal of Economic History, Cambridge University Press, vol. 71(4), pages 976-1005, December.
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    4. Kris James Mitchener & Gary Richardson, 2019. "Network Contagion and Interbank Amplification during the Great Depression," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 465-507.
    5. Gorton, Gary B. & Tallman, Ellis W., 2018. "Fighting Financial Crises," University of Chicago Press Economics Books, University of Chicago Press, number 9780226479514, September.
    6. Jaremski, Matthew, 2015. "Clearinghouses as credit regulators before the fed?," Journal of Financial Stability, Elsevier, vol. 17(C), pages 10-21.
    7. Carlson, Mark, 2005. "Causes of bank suspensions in the panic of 1893," Explorations in Economic History, Elsevier, vol. 42(1), pages 56-80, January.
    8. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    9. Calomiris, Charles W. & Carlson, Mark, 2017. "Interbank networks in the National Banking Era: Their purpose and their role in the Panic of 1893," Journal of Financial Economics, Elsevier, vol. 125(3), pages 434-453.
    10. Wicker,Elmus, 2000. "Banking Panics of the Gilded Age," Cambridge Books, Cambridge University Press, number 9780521770231.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Interbank networks; correspondent banking; the Panic of 1893; bank contagion;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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