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Bank failures and the cost of systemic risk: Evidence from 1900 to 1930

Listed author(s):
  • Kupiec, Paul H.
  • Ramirez, Carlos D.

We measure the effect of bank failures on economic growth using data from 1900 to 1930, a period without active government stabilization policies and several severe banking crises. VAR model estimates suggest bank failures have long-lasting negative effects on economic growth. A bank failure shock involving one percent of system liabilities leads to a 6.5% reduction in GNP growth within three quarters and a measurable reduction for 10 quarters. Panel VAR model estimates for the 48 states show bank failures aggravate commercial non-bank failures. Institutional and regulatory features affect the intensity of the bank failure effect. We find that bank failures have a larger impact in states with deposit insurance, in states more heavily concentrated in agriculture, and in states with fewer large firms. However, because a number of states exhibit all three characteristics, we are not able to clearly identify the true marginal effects of these factors independently.

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 22 (2013)
Issue (Month): 3 ()
Pages: 285-307

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Handle: RePEc:eee:jfinin:v:22:y:2013:i:3:p:285-307
DOI: 10.1016/j.jfi.2012.09.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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