IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/9102.html
   My bibliography  Save this paper

Bank Panics and the Endogeneity of Central Banking

Author

Listed:
  • Gary Gorton
  • Lixin Huang

Abstract

Central banking is intimately related to liquidity provision to banks during times of crisis, the lender-of-last-resort function. This activity arose endogenously in certain banking systems. Depositors lack full information about the value of bank assets so that during macroeconomic downturns they monitor their banks by withdrawing in a banking panic. The likelihood of panics depends on the industrial organization of the banking system. Banking systems with many small, undiversified banks, are prone to panics and failures, unlike systems with a few big banks that are heavily branched and well diversified. Systems of many small banks are more efficient if the banks form coalitions during times of crisis. We provide conditions under which the industrial organization of banking leads to incentive compatible state contingent bank coalition formation. Such coalitions issue money that is a kind of deposit insurance and examine and supervise banks. Bank coalitions of small banks, however, cannot replicate the efficiency of a system of big banks.

Suggested Citation

  • Gary Gorton & Lixin Huang, 2002. "Bank Panics and the Endogeneity of Central Banking," NBER Working Papers 9102, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9102
    Note: CF ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w9102.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Moen, Jon R. & Tallman, Ellis W., 2000. "Clearinghouse Membership and Deposit Contraction during the Panic of 1907," The Journal of Economic History, Cambridge University Press, vol. 60(1), pages 145-163, March.
    2. repec:ucp:bknber:9780226355887 is not listed on IDEAS
    3. 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.
    4. Altig,David E. & Smith,Bruce D. (ed.), 2003. "Evolution and Procedures in Central Banking," Cambridge Books, Cambridge University Press, number 9780521814270.
    5. Bordo, Michael D. & Redish, Angela, 1987. "Why Did the Bank of Canada Emerge in 1935?," The Journal of Economic History, Cambridge University Press, vol. 47(2), pages 405-417, June.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    7. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174, National Bureau of Economic Research, Inc.
    8. Beck, Thorsten, 2002. "Deposit insurance as private club: is Germany a model?," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 701-719.
    9. Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 13(May), pages 10-30.
    10. Calomiris, Charles W & Kahn, Charles M, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning from the Suffolk System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 766-797, November.
    11. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
    12. Arthur J. Rolnick & Bruce Smith & Warren E. Weber, 1998. "Lessons from a laissez-faire payments system: the Suffolk Banking System, 1825-58," Review, Federal Reserve Bank of St. Louis, issue May, pages 105-116.
    13. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    14. Gorton, Gary & Mullineaux, Donald J, 1987. "The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 457-468, November.
    15. Haubrich, Joseph G., 1990. "Nonmonetary effects of financial crises : Lessons from the great depression in Canada," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 223-252, March.
    16. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    17. 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.
    18. Gary Gorton & Lixin Huang, 2001. "Banking Prices and the Origin of Central Banking," Center for Financial Institutions Working Papers 02-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
    19. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(2), pages 283-295, June.
    20. Stephen Morris & Hyun Song Shin, 2001. "Rethinking Multiple Equilibria in Macroeconomic Modeling," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 139-182, National Bureau of Economic Research, Inc.
    21. White, Eugene Nelson, 1984. "A Reinterpretation of the Banking Crisis of 1930," The Journal of Economic History, Cambridge University Press, vol. 44(1), pages 119-138, March.
    22. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1, March.
    23. Wicker,Elmus, 1996. "The Banking Panics of the Great Depression," Cambridge Books, Cambridge University Press, number 9780521562614.
    24. Arthur J. Rolnick & Bruce Smith & Warren E. Weber, 1998. "The Suffolk Bank and the Panic of 1837: how a private bank acted as a lender-of-last-resort," Working Papers 592, Federal Reserve Bank of Minneapolis.
    25. Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, vol. 45(2), pages 277-283, June.
    26. Gary Gorton & Lixin Huang, 2002. "Banking Panics and the Origin of Central Banking," NBER Working Papers 9137, National Bureau of Economic Research, Inc.
    27. Bordo, Michael D. & Rockoff, Hugh & Redish, Angela, 1994. "The U.S. Banking System From a Northern Exposure: Stability versus Efficiency," The Journal of Economic History, Cambridge University Press, vol. 54(2), pages 325-341, June.
    28. Gary Gorton, 1984. "Private clearinghouses and the origins of central banking," Business Review, Federal Reserve Bank of Philadelphia, issue Jan/Feb, pages 3-12.
    29. Wicker,Elmus, 2000. "Banking Panics of the Gilded Age," Cambridge Books, Cambridge University Press, number 9780521770231.
    30. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Calomiris, Charles W. & Flandreau, Marc & Laeven, Luc, 2016. "Political foundations of the lender of last resort: A global historical narrative," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 48-65.
    2. Charles Calomiris, 2009. "Banking Crises and the Rules of the Game," NBER Working Papers 15403, National Bureau of Economic Research, Inc.
    3. Jaremski, Matthew, 2018. "The (dis)advantages of clearinghouses before the Fed," Journal of Financial Economics, Elsevier, vol. 127(3), pages 435-458.
    4. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    5. Charles Calomiris & Joseph R. Mason, 2003. "How to Restructure Failed Banking Systems: Lessons from the U.S. in the 1930's and Japan in the 1990's," NBER Working Papers 9624, National Bureau of Economic Research, Inc.
    6. Gary B. Gorton, 2019. "The Regulation of Private Money," NBER Working Papers 25891, National Bureau of Economic Research, Inc.
    7. Randall Kroszner, 2000. "Lessons from Financial Crises: The Role of Clearinghouses," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 157-171, December.
    8. Jaremski, Matthew & Wheelock, David C., 2020. "The Founding of the Federal Reserve, the Great Depression, and the Evolution of the U.S. Interbank Network," The Journal of Economic History, Cambridge University Press, vol. 80(1), pages 69-99, March.
    9. Christopher Hoag, 2019. "Bank Executive Experience with Clearinghouse Loan Certificates," Working Papers 1903, Trinity College, Department of Economics.
    10. Carlson, Mark, 2005. "Causes of bank suspensions in the panic of 1893," Explorations in Economic History, Elsevier, vol. 42(1), pages 56-80, January.
    11. Charles W. Calomiris & Matthew Jaremski, 2016. "Deposit Insurance: Theories and Facts," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 97-120, October.
    12. Gary B. Gorton, 2016. "The History and Economics of Safe Assets," NBER Working Papers 22210, National Bureau of Economic Research, Inc.
    13. Nicholas A. Curott & Tyler Watts & Benjamin R. Thrasher, 2020. "Government-Cheerleading Bias in Money and Banking Textbooks," Econ Journal Watch, Econ Journal Watch, vol. 17(1), pages 1-98–151, March.
    14. Yorulmazer, Tanju, 2003. "Herd Behavior, Bank Runs and Information Disclosure," MPRA Paper 9513, University Library of Munich, Germany.
    15. Thorsten V. Koppl & James MacGee, 2001. "Limited enforcement and efficient interbank arrangements," Working Papers 608, Federal Reserve Bank of Minneapolis.
    16. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    17. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174, National Bureau of Economic Research, Inc.
    18. Gary Gorton, 2020. "The Regulation of Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S1), pages 21-42, October.
    19. Hoag, Christopher, 2018. "Clearinghouse loan certificates as a lender of last resort," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 215-229.
    20. Committee, Nobel Prize, 2022. "Financial Intermediation and the Economy," Nobel Prize in Economics documents 2022-2, Nobel Prize Committee.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.