Systemic Risk and the Great Depression

38 Pages Posted: 21 Feb 2019

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Kris James Mitchener

Santa Clara University - Leavey School of Business - Economics Department; National Bureau of Economic Research (NBER); CEPR

Angela Vossmeyer

Claremont McKenna College - Robert Day School of Economics and Finance

Multiple version iconThere are 3 versions of this paper

Date Written: 2018

Abstract

We employ a unique hand-collected dataset and a novel methodology to examine systemic risk before and after the largest U.S. banking crisis of the 20th century. Our systemic risk measure captures both the credit risk of an individual bank as well as a bank’s position in the network. We construct linkages between all U.S. commercial banks in 1929 and 1934 so that we can measure how predisposed the entire network was to risk, where risk was concentrated, and how the failure of more than 9,000 banks during the Great Depression altered risk in the network. We find that the pyramid structure of the commercial banking system (i.e., the network’s topology) created more inherent fragility, but systemic risk was nevertheless fairly dispersed throughout banks in 1929, with the top 20 banks contributing roughly 18% of total systemic risk. The massive banking crisis that occurred between 1930{33 raised systemic risk per bank by 33% and increased the riskiness of the very largest banks in the system. We use Bayesian methods to demonstrate that when network measures, such as eigenvector centrality and a bank’s systemic risk contribution, are combined with balance sheet data capturing ex ante bank default risk, they strongly predict bank survivorship in 1934.

Keywords: systemic risk, banking networks, Great Depression, Global Financial Crisis, marginal likelihood

JEL Classification: L100, N200

Suggested Citation

Das, Sanjiv Ranjan and Mitchener, Kris James and Vossmeyer, Angela, Systemic Risk and the Great Depression (2018). CESifo Working Paper No. 7425, Available at SSRN: https://ssrn.com/abstract=3338779

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://srdas.github.io/

Kris James Mitchener

Santa Clara University - Leavey School of Business - Economics Department ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408.554.4340 (Phone)
408.554.2331 (Fax)

HOME PAGE: http://lsb.scu.edu/~kmitchener/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CEPR ( email )

London
United Kingdom

Angela Vossmeyer

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

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