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Interbank connections, contagion and bank distress in the Great Depression✰

Author

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  • Calomiris, Charles W.
  • Jaremski, Matthew
  • Wheelock, David C.

Abstract

Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were vulnerable to closures of their correspondents and their respondents. Further, banks were less responsive to network liquidity risk in their management of cash and capital buffers after the Federal Reserve was established, suggesting that banks expected the Fed to reduce that risk. The Fed's presence weakened incentives for the most systemically important banks to maintain capital and cash buffers against liquidity risk, and thereby likely contributed to the banking system's vulnerability to contagion during the Depression.

Suggested Citation

  • Calomiris, Charles W. & Jaremski, Matthew & Wheelock, David C., 2022. "Interbank connections, contagion and bank distress in the Great Depression✰," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:jfinin:v:51:y:2022:i:c:s104295732030053x
    DOI: 10.1016/j.jfi.2020.100899
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    More about this item

    Keywords

    Bank contagion; Great Depression; Interbank networks; Liquidity risk; Federal Reserve System;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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