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Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the early 1900s

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  • Mark Carlson
  • Matthew S. Jaremski

Abstract

Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.

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  • Mark Carlson & Matthew S. Jaremski, 2020. "Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the early 1900s," NBER Working Papers 27912, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27912
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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913

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