Anatomy of Bank Contagion: Evidence from Helena, Montana During the Panic of 1893
50 Pages Posted: 8 Oct 2013 Last revised: 31 Jul 2014
Date Written: July 29, 2014
Abstract
Theories of bank contagion often highlight the idea that financial crises frequently start as local shocks and then spread to other financial institutions. Conditions in Helena, Montana at the onset of the Panic of 1893 present an ideal laboratory for testing these theories. We use a unique dataset — the daily ledgers from four national banks that operated in Helena, Montana during the early 1890s — to test whether bank contagion existed. We find that a one standard deviation increase in the incidence of news about a bank run elsewhere in the country lead to a 0.05 to 0.30 standard deviations surge in withdrawals in time certificate deposits in all four banks. In addition, we find little evidence that depositors reacted to fundamental shocks. The results, therefore, indicate that depositor behavior was an important mechanism through which contagion took place. A test of increased correlations and narrative evidence based on contemporary newspapers reports confirm these findings. Using a structural VAR we show that withdrawals in one bank do not lead to deposits in any of the remaining banks, suggesting that once deposits left a bank, they did not return to the banking system. Thus, contagion through depositor behavior amplified financial instability during the Panic of 1893.
Keywords: Bank Runs, Contagion, U.S. Banking History
JEL Classification: G21, N21, N11
Suggested Citation: Suggested Citation