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Stopping Contagion with Bailouts: Microevidence from Pennsylvania Bank Networks During the Panic of 1884

35 Pages Posted: 3 Apr 2016  

John C. Bluedorn

International Monetary Fund (IMF) - Research Department

Haelim Park

Government of the United States of America - Office of Financial Research

Date Written: March 31, 2016

Abstract

Using a newly constructed historical dataset on the Pennsylvania state banking system, detailing the amounts of “due-froms” on a debtor-bank-by-debtor-bank basis, we investigate the effects of the Panic of 1884 and subsequent private sector-orchestrated bailout of systemically important banks (SIBs) on the broader banking sector. We find evidence that Pennsylvania banks with larger direct interbank exposures to New York City changed the composition of their asset holdings, shifting from loans to more liquid assets and reducing their New York City correspondent deposits in the near-term. Over the long-term though, only the lower correspondent deposits effect persisted. Our findings show that the banking turmoil in New York City impacted more exposed banks outside New York City, but that bailouts of SIBs by the New York Clearinghouse likely short-circuited a full-scale banking panic.

Keywords: financial networks, contagion, systemic risk, systemically important banks (SIBs)

JEL Classification: E58, G21, G28, N21

Suggested Citation

Bluedorn, John C. and Park, Haelim, Stopping Contagion with Bailouts: Microevidence from Pennsylvania Bank Networks During the Panic of 1884 (March 31, 2016). Journal of Banking and Finance, Forthcoming; OFR WP 16-03. Available at SSRN: https://ssrn.com/abstract=2757698

John C. Bluedorn

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Haelim Park (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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