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Bank Leverage and Regulatory Regimes: Evidence from the Great Depression and Great Recession

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  • Christoffer Koch
  • Gary Richardson
  • Patrick Van Horn

Abstract

In the boom before the Great Depression, capital requirements for commercial banks were low and fixed. Bankers faced double liability. Failing banks were not bailed out. During the boom before the Great Recession, capital requirements were proportional to risk-weighted assets. Bankers faced limited liability. Banks deemed too big to fail received bailouts. During the 1920s, the largest banks increased capital levels as asset prices rose. During the boom from 2002 to 2007, the largest institutions kept capital levels near regulatory minimums. Our results suggest more market discipline would have induced the largest U.S. banks to hold greater capital buffers prior to the financial crisis of 2008.

Suggested Citation

  • Christoffer Koch & Gary Richardson & Patrick Van Horn, 2016. "Bank Leverage and Regulatory Regimes: Evidence from the Great Depression and Great Recession," American Economic Review, American Economic Association, vol. 106(5), pages 538-542, May.
    • Handle: RePEc:aea:aecrev:v:106:y:2016:i:5:p:538-42
    Note: DOI: 10.1257/aer.p20161045
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    References listed on IDEAS

    as
    1. Ben S. Bernanke, 2015. "The Federal Reserve and the Financial Crisis," Economics Books, Princeton University Press, edition 1, number 9928-2.
    2. Ben S. Bernanke, 2015. "Origins and Mission of the Federal Reserve," Introductory Chapters, in: The Federal Reserve and the Financial Crisis, Princeton University Press.
    3. Richardson, Gary & Van Horn, Patrick, 2009. "Intensified Regulatory Scrutiny and Bank Distress in New York City During the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 69(2), pages 446-465, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. John V. Duca & Lilit Popoyan & Susan M. Wachter, 2019. "Real Estate And The Great Crisis: Lessons For Macroprudential Policy," Contemporary Economic Policy, Western Economic Association International, vol. 37(1), pages 121-137, January.
    2. Haelim Anderson & Gary Richardson & Brian Yang, 2023. "Deposit Insurance and Depositor Monitoring: Quasi‐Experimental Evidence from the Creation of the Federal Deposit Insurance Corporation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 441-464, March.
    3. Roberto Robatto, 2019. "Systemic Banking Panics, Liquidity Risk, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 20-42, October.
    4. Martínez, J-F. & Peiris, M.U. & Tsomocos, D.P., 2020. "Macroprudential policy analysis in an estimated DSGE model with a heterogeneous banking system: An application to Chile," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    5. Richardson, Gary & Van Horn, Patrick, 2018. "In the eye of a Storm: Manhattan's money center banks during the international financial crisis of 1931," Explorations in Economic History, Elsevier, vol. 68(C), pages 71-94.
    6. Duca, John V., 2017. "The Great Depression versus the Great Recession in the U.S.: How fiscal, monetary, and financial polices compare," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 50-64.
    7. Riccardo De Bonis & Giuseppe Marinelli & Francesco Vercelli, 2023. "Bank lending in the Great Recession and in the Great Depression," Empirical Economics, Springer, vol. 64(2), pages 567-602, February.
    8. Jose M. Berrospide & Arun Gupta & Matthew P. Seay, 2021. "Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic," Finance and Economics Discussion Series 2021-043, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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