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Correspondent banking, systematic risk, and the Panic of 1893

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  • Cotter, Christopher
  • Rousseau, Peter L

Abstract

During the U.S. National Banking Period (1863-1913), a network of correspondent banking relationships left the nation vulnerable to systemic risks, bank failures, and financial panics. We use comprehensive data on primary correspondent relationships for all national, state, savings, and private banks in the lead up to the Panic of 1893 to show that failures of both upstream and downstream correspondents increased the likelihood that a given bank would itself fail, and that these effects varied over the course of the Panic. Members of the New York Clearinghouse, despite a very low incidence of actual failure, also saw significant weakening of their balance sheets early in the Panic when their downstream respondents failed, and falling stock prices throughout the disruption. The results demonstrate a two-way system-wide weakness of the correspondent system that the Federal Reserve Act of 1914 presumably sought to remedy.

Suggested Citation

  • Cotter, Christopher & Rousseau, Peter L, 2022. "Correspondent banking, systematic risk, and the Panic of 1893," MPRA Paper 113340, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113340
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    References listed on IDEAS

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    1. Haelim Anderson & Mark Paddrik & Jessie Jiaxu Wang, 2019. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," American Economic Review, American Economic Association, vol. 109(9), pages 3125-3161, September.
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    More about this item

    Keywords

    Interbank networks; correspondent banking; the Panic of 1893; bank contagion;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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