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The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk

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  • Edward Simpson Prescott

Abstract

This Economic Commentary describes the collapse and subsequent bailout of the Detroit-headquartered Bank of the Commonwealth in 1972. Commonwealth failed because it invested heavily in long-duration, fixed-rate municipal securities in the mid-1960s in a bet that interest rates would decline. Instead, with the beginning of the Great Inflation of 1965–1980, rates rose. Liquidity problems then ensued, and the bank approached failure. Unable to find an acquirer because of Michigan’s banking restrictions, regulators instead bailed out the bank because of fears of contagion. This article also compares the collapse of Commonwealth with the spring 2023 failures of Silicon Valley Bank and First Republic. In particular, I discuss structural changes in banking that impacted the speed of the runs and the pools of potential acquirers.

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  • Edward Simpson Prescott, 2024. "The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2024(06), pages 1-9, March.
    • Handle: RePEc:fip:fedcec:97959
    DOI: 10.26509/frbc-ec-202406
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    References listed on IDEAS

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    1. Sherman J. Maisel, 1981. "Introduction to "Risk and Capital Adequacy in Commercial Banks"," NBER Chapters, in: Risk and Capital Adequacy in Commercial Banks, pages 1-16, National Bureau of Economic Research, Inc.
    2. Sherman J. Maisel, 1981. "Risk and Capital Adequacy in Commercial Banks," NBER Books, National Bureau of Economic Research, Inc, number mais81-1.
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