Bank Networks and Systemic Risk: Evidence from the National Banking Acts

59 Pages Posted: 21 Mar 2017

See all articles by Mark E. Paddrik

Mark E. Paddrik

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

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation; Yale University - Yale Program on Financial Stability

Jessie Jiaxu Wang

Arizona State University (ASU) - W.P. Carey School of Business; Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 6, 2016

Abstract

The reserve requirements established by the National Banking Acts (NBAs) dictated the amounts and locations of interbank deposits, thereby reshaping the structure of U.S. bank networks. Using unique data on bank balance sheets, along with detailed interbank deposits in 1862 and 1867 in Pennsylvania, we study how the NBAs changed the bank network structure. Further, we quantify the effect on financial stability in a model of interbank networks with liquidity withdrawal. We find that the NBAs led to a concentration of interbank deposits at both the city and the bank level, creating systemically important banks in major financial centers. Our quantitative results show that the newly emerged system was “robust-yet-fragile” – while the concentration of linkages made the system more resilient in general, it increased the likelihood of contagion when financial center banks faced large shocks.

Keywords: bank networks, financial interconnectedness, systemic risk, contagion, liquidity withdrawal, National Banking Act

JEL Classification: N21, G21, G28, L14

Suggested Citation

Paddrik, Mark Endel and Anderson, Haelim and Wang, Jessie Jiaxu, Bank Networks and Systemic Risk: Evidence from the National Banking Acts (December 6, 2016). OFR WP 16-13, Available at SSRN: https://ssrn.com/abstract=2938580 or http://dx.doi.org/10.2139/ssrn.2938580

Mark Endel Paddrik (Contact Author)

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

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Washington DC, DC 20005
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Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation ( email )

550 17th Street NW
Washington, DC 20429
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Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
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Jessie Jiaxu Wang

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://www.jiaxuwang.com

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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