What Does Not Kill You Makes You Stronger: Evidence From a 'Natural' Bank Stress Test Before the Great Depression
20 Pages Posted: 11 Jan 2019
Date Written: January 1, 2019
While modern banks are subject to stress tests based on statistical models, they are often opaque and tuned to understanding general asset quality rather than training management to respond to shocks effectively. This paper examines whether a “natural” stress test provides sufficient information and learning to allow affected banks to survive a subsequent larger panic. We show that the Great Mississippi Flood of 1927 — a major but local natural disaster — prepared affected banks to survive during the Great Depression. While flood-affected banks saw no differential closure rates relative to unaffected banks in their immediate surrounding area between 1927 and 1929, they were significantly less likely to close between 1930 and 1932. Our evidence suggests that this effect is a result of training management to respond to shocks.
Keywords: Bank Stress Tests, Great Depression, Bank Failure, Great Mississippi Flood of 1927
JEL Classification: G21, G32, N22
Suggested Citation: Suggested Citation