Bank Utilization, Institutions, and Run Behavior in Newly Enfranchised Populations: Evidence from the Freedman's Bank and Trust

Abstract

We analyze the banking behavior of marginalized demographic groups who are being brought into the financial system for the first time. Using the records of the Freedman Savings and Trust Bank, a mutual savings bank chartered in the United States in the 1860's for the benefit of newly-freed black slaves, we find that these groups respond very quickly to negative financial information during the Panic of 1873, and that the variation in the response is primarily determined by issues other than informational distance, and is more potentially more severe in rural areas with more limited information but also more limited interaction with financial institutions. We also document that institutional money tends to flee the bank more slowly in spite of the more frequent transactional behavior, indicating a strong roll for trust in banking runs. We also find that social violence has a dampening effect on banking behavior in nearby branches.

Keywords: banking, bank runs, financial literacy, development economics

JEL Classification: G21, N11