Bank capital and portfolio management: the 1930s capital crunch and scramble to shed risk
Recent models of banking under asymmetric information argue that depositors penalize banks that offer high-risk deposits. Focusing on New York City banks in the 1920's and 1930's, this study examines how banks manage risk during normal times and in response to severe shocks. We develop and apply a simple framework that identifies the tradeoffs among alternative means of satisfying depositors' preferences for low-risk deposits (i.e. low asset risk versus high capital). During the 1920's profitable lending opportunities and low costs of raising capital prompted banks to increase their asset risk, while increasing capital to maintain low default risks on deposits. Cross-sectional differences in the cost of raising equity explain differences in banks' choices of asset risk and capital ratios. In the wake of the loan losses produced by the Depression, high default risk was penalized with deposit withdrawals. To reduce deposit risk, banks increased their riskless assets and cut dividends, but avoided costly equity issues. Banks with high default risk or with high costs of raising equity contracted dividends the most during the 1930's.
(This abstract was borrowed from another version of this item.)
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||1996|
|Date of revision:|
|Publication status:||Published in Conference on Bank Structure and Competition (1996 : 32rd)|
|Contact details of provider:|| Postal: |
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kashyap, Anil K. & Stein, Jeremy C., 1995.
"The impact of monetary policy on bank balance sheets,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 42(1), pages 151-195, June.
- Anil K Kashyap & Jeremy C. Stein, 1994. "The Impact of Monetary Policy on Bank Balance Sheets," NBER Working Papers 4821, National Bureau of Economic Research, Inc.
- Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995.
"The role of capital in financial institutions,"
Journal of Banking & Finance,
Elsevier, vol. 19(3-4), pages 393-430, June.
- Allen N. Berger & Richard J. Herring & Giorgio P. Szegö, 1995. "The Role of Capital in Financial Institutions," Center for Financial Institutions Working Papers 95-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Allen N. Berger & Richard J. Herring & Giorgio P. Szego, 1995. "The role of capital in financial institutions," Finance and Economics Discussion Series 95-23, Board of Governors of the Federal Reserve System (U.S.).
- Edward J. Kane & Berry K. Wilson, 1998.
"A contracting-theory intepretation of the origins of Federal deposit insurance,"
Federal Reserve Bank of Cleveland, issue Aug, pages 573-595.
- Kane, Edward J & Wilson, Berry K, 1998. "A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 573-95, August.
- Edward J. Kane & Berry K. Wilson, 1998. "A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance," NBER Working Papers 6451, National Bureau of Economic Research, Inc.
- Bernanke, Ben S, 1983.
"Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression,"
American Economic Review,
American Economic Association, vol. 73(3), pages 257-76, June.
- Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
- Joe Peek & Eric S. Rosengren, 1996.
"The international transmission of financial shocks: the case of Japan,"
96-1, Federal Reserve Bank of Boston.
- Peek, Joe & Rosengren, Eric S, 1997. "The International Transmission of Financial Shocks: The Case of Japan," American Economic Review, American Economic Association, vol. 87(4), pages 495-505, September.
- Joe Peek & Eric S. Rosengren, 1996. "The International Transmission of Financial Shocks: The Case of Japan," Boston College Working Papers in Economics 357, Boston College Department of Economics.
- Herbert L. Baer & John N. McElravey, 1993. "Capital shocks and bank growth -- 1973 to 1991," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 2-21.
- Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
- Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
- Charles W. Calomiris & Charles M. Kahn & Stefan Krasa, 1991. "Optimal contingent bank liquidation under moral hazard," Working Paper Series, Issues in Financial Regulation 91-13, Federal Reserve Bank of Chicago.
- Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Balke, Nathan S & Gordon, Robert J, 1989. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 38-92, February.
- Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- Hayne E. Leland and David H. Pyle., 1976.
"Informational Asymmetries, Financial Structure, and Financial Intermediation,"
Research Program in Finance Working Papers
41, University of California at Berkeley.
- Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
- Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September.
- Charles W. Calomiris, 1993. "Financial Factors in the Great Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 61-85, Spring.
- Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhpr:521. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.