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Interbank Connections, Contagion and Bank Distress in the Great Depression

Charles Calomiris, Matthew Jaremski () and David Wheelock ()

No 2019-1, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network risk, suggesting that banks expected the Fed to reduce network risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression.

Keywords: Bank Contagion; Great Depression; Interbank Networks; Liquidity Risk; Federal Reserve System (search for similar items in EconPapers)
JEL-codes: G21 L14 N22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his and nep-mon
Date: 2019-01-01
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DOI: doi.org/10.20955/wp.2019.001

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