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The cost of banking panics in an age before “Too Big to Fail”

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  • Benjamin Chabot

Abstract

How costly were the banking panics of the National Banking Era (1861-1913)? I combine two hand-collected data sets - the weekly statements of the New York Clearing House banks and the monthly holding period return of every stock listed on the NYSE - to estimate the cost of banking panics in an era before “too big to fail.” The bank statements allow me to construct a hypothetical insurance contract which would have allowed investors to insure against sudden deposit withdrawals and the cross-section of stock returns allow us to draw inferences about the marginal utility during panic states. Panics were costly. The cross-section of gilded-age stock returns imply investors would have willingly paid a 14% annual premium above actuarial fair value to insure $100 against unexpected deposit withdrawals The implied consumption of stock investors suggests that the consumption loss associated with National Banking Era bank runs was far more costly than the consumption loss from stock market crashes.

Suggested Citation

  • Benjamin Chabot, 2011. "The cost of banking panics in an age before “Too Big to Fail”," Working Paper Series WP-2011-15, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2011-15
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2011/wp2011_15.pdf
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    References listed on IDEAS

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    1. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-590, June.
    2. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-140, March.
    3. Sandro Brusco & Fabio Castiglionesi, 2007. "Liquidity Coinsurance, Moral Hazard, and Financial Contagion," Journal of Finance, American Finance Association, vol. 62(5), pages 2275-2302, October.
    4. Wicker,Elmus, 2000. "Banking Panics of the Gilded Age," Cambridge Books, Cambridge University Press, number 9780521770231.
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    Cited by:

    1. Chabot, Benjamin & Herman, Gabe, 2013. "A History of Large-Scale Asset Purchases before the Federal Reserve," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 140-152.

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    Keywords

    National Bank Act ; Financial crises;

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