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

See all articles by Philipp Ager

Philipp Ager

University of Southern Denmark - Department of Business and Economics; Centre for Economic Policy Research (CEPR)

Matthew Jaremski

Utah State University - Huntsman School of Business; National Bureau of Economic Research (NBER)

Date Written: January 1, 2019

Abstract

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

Ager, Philipp and Jaremski, Matthew, What Does Not Kill You Makes You Stronger: Evidence From a 'Natural' Bank Stress Test Before the Great Depression (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=3306005 or http://dx.doi.org/10.2139/ssrn.3306005

Philipp Ager

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Matthew Jaremski (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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