An Illusory Feeling of Stability: Bank Failures in France in the 1920s

David Demilly ()
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David Demilly: CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas, Banque de France

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Abstract: This article uses historical data from French banks to document the sources of bank failures in France between 1918 and 1928. The analysis shows that failed banks faced a liquidity and not a solvency issue. Indeed, a high capital ratio has led to an illusory feeling of stability, encouraging banks to invest in risky activities. Suffering losses or unable to meet repayment requests, they were forced to default. Conversely, banks' readily available liquidity is associated with a reduced probability of failure, highlighting its protective role against shocks and strengthening the argument of the liquidity shortage. These results specific to the 1920s can be explained by the context of monetary instability which favored speculation. However, the involvement of the banking sector in financing public debt has prevented most banks from falling into the trap of excessive risk-taking and illiquidity, thus avoiding a significant increase in banking failures.

Keywords: Depository Institutions; Banks; Capital and Ownership Structure; Financial Risk and Risk Management; Financing Policy; Liquidation; Bankruptcy (search for similar items in EconPapers)
Date: 2025-09-29
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