Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the Early 1900s

23 Pages Posted: 14 Oct 2020

See all articles by Mark A. Carlson

Mark A. Carlson

Board of Governors of the Federal Reserve System

Matthew Jaremski

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

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Date Written: October 2020

Abstract

Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.

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Suggested Citation

Carlson, Mark A. and Jaremski, Matthew, Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the Early 1900s (October 2020). NBER Working Paper No. w27912, Available at SSRN: https://ssrn.com/abstract=3709602

Mark A. Carlson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Matthew Jaremski

Utah State University - Huntsman School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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