Search

Countercyclical capital buffers (CCyBs) are an old idea recently resurrected. CCyBs compel banks at the core of financial systems to accumulate capital during expansions so that they are better able to sustain operations during downturns. To gauge the potential impact of modern CCyBs, we compare the behavior of large and highly-connected commercial banks during booms before the Great Depression and Great Recession. Before the former, core banks did not expect bailouts and were subject to regulations that incentivized capital accumulation during booms. Before the later, core banks expected bailouts and kept capital levels close to regulatory minima. Our analysis indicates that the pre-Depression regulatory regime induced money-center banks to build capital buffers between 3% and 5% of total assets during economic expansions, which is up to double the maximum modern CCyB. These buffers enabled those banks to continue operations without government assistance during severe crises. This historical analogy indicates that modern countercyclical buffers may achieve their immediate goals of protecting core banks during crises but raises questions about whether they will contribute to overall financial stability.

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.

We analyze the impact of contractionary monetary policy through increases in reserve requirements on bank lending. We compare the lending behavior of banks that were subject to the requirement increases in 1936–37, Federal Reserve member banks, to a group of banks that were not subject to the reserve increase, Federal Reserve nonmember banks. After implementing the difference-in-difference estimators, we find that the increases in reserve requirements did not create financing constraints for member banks and lead them to reduce lending. Therefore, the actions of the Federal Reserve concerning the required reserve ratios cannot be blamed for instigating the economic downturn of 1937–38.

In the summer of 1931, a financial crisis began in Austria, spread to Germany, forced Britain to abandon the gold standard, crossed the Atlantic, and afflicted financial institutions in the United States. This article describes how banks in New York City, the central money market of the United States, reacted to this trans-Atlantic trauma. New York's money-center banks anticipated the onset of a financial crisis, prepared for it by accumulating substantial reserves, and during the European crisis, continued business as usual. New York's leading bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States. New York banks’ behavior changed only after the Federal Reserve raised discount rates to stem gold outflows in the fall of 1931.

This essay traces a movement in New York State in the late 19th and early 20th centuries to protect depositors in small, private banks. These depositors were often located in immigrant communities that did not possess the local level of capital to support a national or state-chartered bank. Small private banks, the only entities that often served certain poor areas, were less regulated than state-chartered or national banks, especially with regard to capital levels and quality of assets. The fact that bank managers possessed the ability and incentives to assume additional risk exposed depositors in these small private banks to an increased danger of moral hazard. implicitly recognizing this risk, state officials in New York after the Panic of 1893 began a movement that spanned three decades to reduce the incentives for moral hazard and increase the protection for depositors in these immigrant communities.

New data reveals that bank distress peaked in New York City, at the center of the United States money market, in July and August 1931, when the banking crisis peaked in Germany and before Britain abandoned the gold standard. This paper tests competing theories about the causes of New York's banking crisis. The cause appears to have been intensified regulatory scrutiny, which was a delayed reaction to the failure of the Bank of United States, rather than the exposure of money-center banks to events overseas.

A banking crisis began in Austria in May 1931 and intensified in July, when runs struck banks throughout Germany. In September, the crisis compelled Britain to quit the gold standard. Newly discovered data shows that failure rates rose for banks in New York City, at the center of the United States money market, in July and August 1931, before Britain abandoned the gold standard and before financial outflows compelled the Federal Reserve to raise interest rates. Banks in New York City had large exposures to foreign deposits and German debt. This paper tests to see whether the foreign exposure of money center banks linked the financial crises on the two sides of the Atlantic.

A banking crisis began in Austria in May 1931 and intensified in July, when runs struck banks throughout Germany. In September, the crisis compelled Britain to quit the gold standard. Newly discovered data shows that failure rates rose for banks in New York City, at the center of the United States money market, in July and August 1931, before Britain abandoned the gold standard and before financial outflows compelled the Federal Reserve to raise interest rates. Banks in New York City had large exposures to foreign deposits and German debt. This paper tests to see whether the foreign exposure of money center banks linked the financial crises on the two sides of the Atlantic.

Recent turmoil in the financial sector has once again thrust bank liquidity and balance sheet management into the spotlight. History offers some insight into liquidity management in times of financial distress. The banking industry experienced a significant amount of turmoil during the Great Contraction of 1929-1933. In response, banks were forced to adjust their portfolios with the changing economic climate. One aspect banks had control over was their reserves. While there has been extensive analysis of bank reserves after the bank holiday of 1933, little is known about bank-level reserve holdings during the Contraction. This paper exploits a unique data set of state banks that were Federal Reserve members and state banks that were not members of the Federal Reserve Sysytem in New York City during that period. Nonmember banks, without access to a lender of last resort, had a precautionary demand for reserves, increasing their ratio of excess reserves to assets after the first banking panic. Compared to state member banks, nonmember banks held a higher ratio of assets in excess reserves. The interest rates on shortterm, liquid securities had a negative correlation with reserves and support the opportunity cost theory of Frost (1971). The discount rate, representing the price of liquidity, had a positive relationship with reserves, suggesting that Federal Reserve policy could have affected excess reserve holdings during the Great Contraction. These results provide new evidence on the macroeconomic and monetary factors affecting bank behavior in the central money market during the Great Contraction and provide some guidance for policy considerations currently facing monetary authorities.