The Costs of Financial Crises in the United States

Abstract

Using a newly-constructed panel dataset of U.S. states from 1863 to 2022 that combines bank balance sheets, real economic activity, and a systematic survey of all major chronologies of U.S. financial crises, we document the following facts: (i) financial crises are followed by a 6% decline in state-level output, (ii) output losses vary substantially across states, (iii) the severity of output losses is predictable with local contractions in deposits or wholesale liabilities, and with the incidence of bank failures, (iv) a composite measure of local financial distress, combining narrative evidence with statistical indicators, predicts state-level output losses of 3%, and (v) the share of states experiencing local financial distress predicts national output beyond a binary crisis indicator. These findings suggest that studies of systemic crises may underestimate the frequency and costs of financial distress.

Keywords: Financial Crises, Regional Crises, State-Level Business Cycles

JEL Classification: C38, N91, N92, O47