Payments Crises and Consequences

Abstract

Ongoing financial innovation raises the specter of payment-system instability. Little aggregate evidence on the repercussions of payment suspensions exists. State-level experiments fill this gap. Four times in the last forty years, U.S. governors suspended payments from state-insured depository institutions. Rhode Island’s payments crisis (1991), which was large, prolonged, and occurred during a recession, substantially lengthened and deepened the downturn. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little macroeconomic impact. Data sparsity inhibits analysis of these events with standard methods. To perform inference, we develop a novel Bayesian method for synthetic control which generates output useful for policymakers and theorists. Our findings suggest policies that ensure institutions continue to process payments on a business-as-usual basis at all times have substantial value.

Keywords: Payments crises, Bank suspensions, Synthetic control, Bayesian methods, Recessions, Bailouts