The effect of banking crises on deposit growth: State-level evidence from 1900 to 1930.

Using a newly constructed database of bank failures for the period 1900 to 1930, this paper estimates a dynamic regression model to examine the extent to which banking instability at the state level affects the proportion of state deposits relative to national deposits. The main results indicate that banking failures reduce the proportion of state deposits by approximately 0.04% in the short run and by nearly 1% in the long run. In the eight states that adopted deposit insurance systems during the 1910s, however, there is little evidence that banking crises affected deposit growth. In addition, there is no evidence that the banking crisis of the 1980s and 1990s had any significant effect on state deposit growth. These results suggest that deposit insurance may have lessened the effects of banking instability on deposit growth. [ABSTRACT FROM AUTHOR]