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Regulation and bank failures: new evidence from the agricultural collapse of the 1920's

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  • David C. Wheelock

Abstract

This article examines the contribution of government policies to the high number of bank failures in the United States during the l920s. I consider the state of Kansas, which had a system of voluntary deposit insurance and where branch banking was strictly prohibited, and find that bank failure rates were highest in counties suffering the greatest agricultural distress and where deposit insurance system membership was the highest. The evidence for Kansas illustrates how prohibitions on branch banking caused unit banks to be especially susceptible to local economic shocks, and suggests that, despite regulations to limit risktaking, deposit insurance caused more bank failures than would have occurred otherwise.

Suggested Citation

  • David C. Wheelock, 1991. "Regulation and bank failures: new evidence from the agricultural collapse of the 1920's," Working Papers 1991-006, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1991-006
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    References listed on IDEAS

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    1. White, Eugene Nelson, 1984. "A Reinterpretation of the Banking Crisis of 1930," The Journal of Economic History, Cambridge University Press, vol. 44(01), pages 119-138, March.
    2. Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 10-30.
    3. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
    4. Wheelock, David C & Kumbhakar, Subal C, 1995. "Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 186-201, February.
    5. Wheelock, David C, 1992. "Deposit Insurance and Bank Failures: New Evidence from the 1920s," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 530-543, July.
    6. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-438, July.
    7. Thornton Cooke, 1909. "The Insurance of Bank Deposits in the West," The Quarterly Journal of Economics, Oxford University Press, vol. 24(1), pages 85-88.
    8. White, Eugene Nelson, 1985. "The Merger Movement in Banking, 1919–1933," The Journal of Economic History, Cambridge University Press, vol. 45(02), pages 285-291, June.
    9. Alston Lee J. & Grove Wayne A. & Wheelock David C., 1994. "Why Do Banks Fail? Evidence from the 1920s," Explorations in Economic History, Elsevier, vol. 31(4), pages 409-431, October.
    10. Alston, Lee J., 1983. "Farm Foreclosures in the United States During the Interwar Period," The Journal of Economic History, Cambridge University Press, vol. 43(04), pages 885-903, December.
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    Citations

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    Cited by:

    1. Michael D. Bordo, 2017. "An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime," Economics Working Papers 17108, Hoover Institution, Stanford University.
    2. Mitchener, Kris James & Wheelock, David C., 2013. "Does the structure of banking markets affect economic growth? Evidence from U.S. state banking markets," Explorations in Economic History, Elsevier, vol. 50(2), pages 161-178.
    3. Bixter, Michael T. & Luhmann, Christian C., 2014. "Shared losses reduce sensitivity to risk: A laboratory study of moral hazard," Journal of Economic Psychology, Elsevier, vol. 42(C), pages 63-73.
    4. Eugene N. White, 2014. "Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Chapters,in: Housing and Mortgage Markets in Historical Perspective, pages 115-158 National Bureau of Economic Research, Inc.
    5. Davison, Lee K. & Ramirez, Carlos D., 2014. "Local banking panics of the 1920s: Identification and determinants," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 164-177.
    6. Muge Adalet, 2009. "Were Universal Banks More Vulnerable to Banking Failures? Evidence From the 1931 German Banking Crisis," Koç University-TUSIAD Economic Research Forum Working Papers 0911, Koc University-TUSIAD Economic Research Forum.
    7. Rajeev Dehejia & Adriana Lleras-Muney, 2007. "Financial Development and Pathways of Growth: State Branching and Deposit Insurance Laws in the United States, 1900–1940," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 239-272.
    8. Kris James Mitchener, 2007. "Are Prudential Supervision and Regulation Pillars of Financial Stability? Evidence from the Great Depression," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 273-302.
    9. Ramirez, Carlos D., 2003. "Did branch banking restrictions increase bank failures? Evidence from Virginia and West Virginia in the late 1920s," Journal of Economics and Business, Elsevier, vol. 55(4), pages 331-352.
    10. Jaremski, Matthew & Wheelock, David C., 2017. "Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock," Working Papers 2017-36, Federal Reserve Bank of St. Louis.
    11. Gary B. Gorton & Andrew Metrick, 2013. "The Federal Reserve and Financial Regulation: The First Hundred Years," NBER Working Papers 19292, National Bureau of Economic Research, Inc.
    12. Kupiec, Paul H. & Ramirez, Carlos D., 2013. "Bank failures and the cost of systemic risk: Evidence from 1900 to 1930," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 285-307.
    13. Marc Flandreau & Gabriel Geisler Mesevage, 2014. "The Separation of Information and Lending and the Rise of Rating Agencies in the United States," IHEID Working Papers 11-2014, Economics Section, The Graduate Institute of International Studies.

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