Micro-Evidence From a System-Wide Financial Meltdown: The German Crisis of 1931

58 Pages Posted: 15 Aug 2019 Last revised: 16 Jun 2020

See all articles by Kristian Blickle

Kristian Blickle

Federal Reserve Banks - Federal Reserve Bank of New York

Markus K. Brunnermeier

Princeton University - Department of Economics

Stephan Luck

Federal Reserve Bank of New York

Date Written: August 12, 2019

Abstract

This paper studies a major financial panic, the run on the German banking system in 1931, to distinguish between banking theories that view depositors as demanders of liquidity and those that view them as providers of discipline. Our empirical approach exploits the fact that the German Crisis of 1931 was system-wide with cross-sectional variation in deposit flows as well as bank distress and took place in absence of a deposit insurance scheme. We find that interbank deposit flows predict subsequent bank distress early on. In contrast, wholesale depositors are more likely to withdraw from distressed banks at later stages of the run and only after the interbank market has started to collapse. Retail deposits are—despite the absence of deposit insurance—largely stable. Our findings emphasize the heterogeneity in depositor roles, with discipline being best provided through the interbank market.

Keywords: bank runs, financial crisis, banking panics, banking regulation

JEL Classification: G01, G21, N20, N24

Suggested Citation

Blickle, Kristian and Brunnermeier, Markus Konrad and Luck, Stephan, Micro-Evidence From a System-Wide Financial Meltdown: The German Crisis of 1931 (August 12, 2019). Available at SSRN: https://ssrn.com/abstract=3436140 or http://dx.doi.org/10.2139/ssrn.3436140

Kristian Blickle

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Stephan Luck (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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