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Bank failures in banking panics: Risky banks or road kill?

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  • Gerald P. Dwyer
  • R. W. Hafer

Abstract

Are banks that fail in banking panics the riskiest ones prior to the panics? The free banking era in the United States provides useful data to examine this question because the assets held by the banks were traded at the New York Stock Exchange. The authors estimate the ex ante riskiness of a bank’s portfolio by examining the portfolio relative to mean-variance frontiers and by examining the bank's leverage and notes relative to assets. The authors find that the ex ante riskiness of a bank’s portfolio helps predict which banks fail and the extent of noteholders’ losses in the event of failure.

Suggested Citation

  • Gerald P. Dwyer & R. W. Hafer, 2001. "Bank failures in banking panics: Risky banks or road kill?," FRB Atlanta Working Paper 2001-13, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2001-13
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    References listed on IDEAS

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    1. Meng, Chun-Lo & Schmidt, Peter, 1985. "On the Cost of Partial Observability in the Bivariate Probit Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 71-85, February.
    2. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," Review of Financial Studies, Society for Financial Studies, pages 315-342.
    3. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, pages 689-700.
    4. Economopoulos, Andrew J., 1990. "Free bank failures in New York and Wisconsin: A portfolio analysis," Explorations in Economic History, Elsevier, vol. 27(4), pages 421-441, October.
    5. George A. Selgin & Lawrence H. White, 1994. "How Would the Invisible Hand Handle Money?," Journal of Economic Literature, American Economic Association, pages 1718-1749.
    6. Economopoulos, Andrew & O'Neill, Heather, 1995. "Bank Entry during the Antebellum Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1071-1085, November.
    7. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, pages 689-700.
    8. Dwyer, Gerald Jr. & Hasan, Iftekhar, 2007. "Suspension of payments, bank failures, and the nonbank public's losses," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 565-580, March.
    9. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, pages 361-387.
    10. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-288, May.
    11. Gorton, Gary, 1999. "Pricing free bank notes," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 33-64, August.
    12. Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 25-46, January.
    13. Poirier, Dale J., 1980. "Partial observability in bivariate probit models," Journal of Econometrics, Elsevier, vol. 12(2), pages 209-217, February.
    14. Economopoulos, Andrew J, 1988. "Illinois Free Banking Experience," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 249-264, May.
    15. Gorton, Gary, 1996. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 346-397, April.
    16. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, pages 1080-1091.
    17. Gerald P. Dwyer, 1996. "Wildcat banking, banking panics, and free banking in the United States," Economic Review, Federal Reserve Bank of Atlanta, pages 1-20.
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    Citations

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    Cited by:

    1. Gerald P. Dwyer & Margarita Samartín, 2006. "Why do banks promise to pay par on demand?," FRB Atlanta Working Paper 2006-26, Federal Reserve Bank of Atlanta.
    2. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, pages 147-169.
    3. François Marini, 2006. "Optimal financial crises: A note on Allen and Gale," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), pages 61-66.
    4. Patrick Van Cayseele, 2004. "Financial consolidation and liquidity: prudential regulation and/or competition policy?," Working Paper Research 50, National Bank of Belgium.

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    Keywords

    Risk ; Debt ; Bank supervision ; Bank failures;

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