Fundamentals, Panics and Bank Distress During the Depression

56 Pages Posted: 13 Dec 2002

See all articles by Joseph R. Mason

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Date Written: November 2002

Abstract

This paper provides the first comprehensive econometric analysis of the causes of bank distress during the Depression. We assemble bank-level data for Fed member banks, and combine those data with county-level, state-level, and national-level economic characteristics to capture cross-sectional and inter-temporal variation in the fundamental determinants of bank failure. We find that fundamentals explain most of the incidence of bank failure, and argue that "contagion" or "liquidity crises" were a relatively unimportant influence on bank failure risk prior to 1933. At the national level, we find that the first two banking crises identified by Friedman and Schwartz in 1930 and 1931 are not associated with positive unexplained residual failure risk, or with changes in the importance of liquidity measures for forecasting bank failures. The third banking crisis they identify is a more ambiguous case, but even if one views it as a bona fide liquidity crisis, the size of the contagion effect could not have been very large. The last banking crisis they identify - at the beginning of 1933 - is associated with important, unexplained increases in bank failure risk. We also investigate the potential role of regional or local contagion and illiquidity for promoting bank failure and find some evidence in support of such effects, but these are of small importance in the aggregate.

Keywords: banks, contagion, panic, distress, Great Depression

JEL Classification: E5, N2, G2

Suggested Citation

Mason, Joseph R. and Calomiris, Charles W., Fundamentals, Panics and Bank Distress During the Depression (November 2002). Available at SSRN: https://ssrn.com/abstract=348380 or http://dx.doi.org/10.2139/ssrn.348380

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
212-316-9219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
635
Abstract Views
3,588
Rank
77,112
PlumX Metrics