Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873

49 Pages Posted: 11 Aug 2021

See all articles by Haelim Anderson

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation; Yale University - Yale Program on Financial Stability

Kinda Hachem

University of Chicago - Booth School of Business

Simpson Zhang

Office of Financial Research; Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2021

Abstract

We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.

Keywords: Financial Crisis, Bank Runs, Liquidity, Clearinghouse, Interbank Market

JEL Classification: D53, D62, E42, E50, G01, N21

Suggested Citation

Anderson, Haelim and Hachem, Kinda and Zhang, Simpson, Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873 (May 2021). FDIC Center for Financial Research Paper No. 2021-02, Available at SSRN: https://ssrn.com/abstract=3901982 or http://dx.doi.org/10.2139/ssrn.3901982

Haelim Anderson (Contact Author)

Government of the United States of America – Federal Deposit Insurance Corporation ( email )

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Kinda Hachem

University of Chicago - Booth School of Business ( email )

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Simpson Zhang

Office of Financial Research ( email )

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Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

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