Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Contagion Risk?

Mark Carlson and David Wheelock

Journal of Money, Credit and Banking, 2018, vol. 50, issue 8, 1711-1750

Abstract: The Federal Reserve System was established to supplant the private interbank system, which was widely seen as a source of instability. We examine how the Fed's presence affected the interbank system's resilience to solvency and liquidity shocks and whether those shocks might have been contagious. The interbank system became more resilient to solvency shocks but less resilient to liquidity shocks as banks sharply reduced their liquid assets after the Fed's founding. The industry's response illustrates how the introduction of a lender of last resort can alter private behavior in ways that increase the likelihood that the lender will be needed.

Date: 2018
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Citations: View citations in EconPapers (20)

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https://doi.org/10.1111/jmcb.12520

Related works:
Working Paper: Did the founding of the Federal Reserve affect the vulnerability of the interbank system to contagion risk? (2016)
Working Paper: Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Congation Risk? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:50:y:2018:i:8:p:1711-1750

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