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Income Shocks and the Mechanics of Bank Distress: Evidence from the 1920s Commodity Price Bust

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  • Messer, Todd
  • Rieder, Kilian

Abstract

How do negative shocks to borrower income affect bank stability? We show theoretically and empirically that income shocks can explain bank distress via an asset- and a liability-side channel. Exploiting an exogenous commodity price bust that hit the U.S. agricultural sector in the early 1920s and novel micro data, we find that realized and expected declines in income caused loan defaults and deposit withdrawals. While the shock's effects on both sides of the balance sheet drove bank distress, the loss of stable funding represented the key driver. We document that public liquidity provision reduced bank instability and provide evidence suggesting that real adjustment to the financial fallout of the shock took the form of out-migration and changes in ownership structure.

Suggested Citation

  • Messer, Todd & Rieder, Kilian, 2025. "Income Shocks and the Mechanics of Bank Distress: Evidence from the 1920s Commodity Price Bust," CEPR Discussion Papers 20372, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20372
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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