Deposit Stability in Uncertain Times: Evidence from the 1918 Influenza Pandemic
38 Pages Posted: 22 Jun 2020 Last revised: 27 Nov 2023
There are 4 versions of this paper
Deposit Stability in Uncertain Times: Evidence from the 1918 Influenza Pandemic
The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic
The Effect of the Central Bank Liquidity Support During Pandemics: Evidence from the 1918 Spanish Influenza Pandemic
Date Written: November 17, 2023
Abstract
The run on Silicon Valley Bank ignited a debate about potential banking reforms, including expanding the set of deposits which are FDIC-insured. But does expanding deposit insurance necessarily increase banks’ deposit stability? We examine this question by analyzing deposit stability of NY banks during the 1918 influenza epidemic. At the time, banks accepted regular and preferred deposits, where the latter received priority in repayment during bankruptcy and was favored by institutional investors. Using a difference-in-differences approach, we estimate how the epidemic affected banks’ capital structure and asset portfolio. A main finding is that although regular deposits were not withdrawn from banks during this crisis period, institutional investors withdrew their preferred deposits from banks that were most at risk from the epidemic’s effects. Protections in bankruptcy, then, were not enough to stop institutional investors from withdrawing their deposits, a result that policymakers should consider when evaluating how different types of depositors today will value deposit insurance during times of stress.
Keywords: 1918 Influenza Pandemic, Deposit Flows, Funding Stability, Discount Window Borrowing, Bank Lending
JEL Classification: E32, G21, N22
Suggested Citation: Suggested Citation