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Bank failures and the cost of systemic risk: Evidence from 1900 to 1930

Paul Kupiec () and Carlos Ramirez ()

Journal of Financial Intermediation, 2013, vol. 22, issue 3, 285-307

Abstract: We measure the effect of bank failures on economic growth using data from 1900 to 1930, a period without active government stabilization policies and several severe banking crises. VAR model estimates suggest bank failures have long-lasting negative effects on economic growth. A bank failure shock involving one percent of system liabilities leads to a 6.5% reduction in GNP growth within three quarters and a measurable reduction for 10 quarters. Panel VAR model estimates for the 48 states show bank failures aggravate commercial non-bank failures. Institutional and regulatory features affect the intensity of the bank failure effect. We find that bank failures have a larger impact in states with deposit insurance, in states more heavily concentrated in agriculture, and in states with fewer large firms. However, because a number of states exhibit all three characteristics, we are not able to clearly identify the true marginal effects of these factors independently.

Keywords: Bank failures; Output growth; Credit channel; Systemic risk; Vector autoregressions; Non-bank commercial failures (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.jfi.2012.09.005

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Handle: RePEc:eee:jfinin:v:22:y:2013:i:3:p:285-307