Correspondent Banking, Systematic Risk, and the Panic of 1893

25 Pages Posted: 20 May 2022

See all articles by Christopher Cotter

Christopher Cotter

Oberlin College

Peter L. Rousseau

Vanderbilt University - Department of Economics

Date Written: May 19, 2022

Abstract

During the U.S. National Banking Period (1863-1913), a network of correspondent banking relationships left the nation vulnerable to systemic risks, bank failures, and financial panics. We use comprehensive data on primary correspondent relationships for all national, state, savings, and private banks in the lead up to the Panic of 1893 to show that failures of both upstream and downstream correspondents increased the likelihood that a given bank would itself fail, and that these effects varied over the course of the Panic. Members of the New York Clearinghouse, despite a very low incidence of actual failure, also saw significant weakening of their balance sheets early in the Panic when their downstream respondents failed, and falling stock prices throughout the disruption. The results demonstrate a two-way system-wide weakness of the correspondent system that the Federal Reserve Act of 1914 presumably sought to remedy.

Keywords: Interbank networks, correspondent banking, the Panic of 1893, bank contagion

JEL Classification: G01, G21, L14, N21

Suggested Citation

Cotter, Christopher and Rousseau, Peter L., Correspondent Banking, Systematic Risk, and the Panic of 1893 (May 19, 2022). Available at SSRN: https://ssrn.com/abstract=4113679 or http://dx.doi.org/10.2139/ssrn.4113679

Christopher Cotter

Oberlin College ( email )

Oberlin, OH 44074
United States

Peter L. Rousseau (Contact Author)

Vanderbilt University - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-343-2466 (Phone)
615-343-8495 (Fax)

HOME PAGE: http://www.vanderbilt.edu/econ/faculty/rousseau.html

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