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February 17, 2008

Financial Panics are Undiscerning, Example XXXIX in a Series

A fascinating example from a recent paper of how financial panics are undiscerning in their carnage and collateral damage. Many of the banks that failed during Great Depression bank panics were as healthy as the ones that didn't:

This paper ... investigates whether the [Depression bank] panics resulted in the failure and liquidation of banks that might otherwise have been able to pursue a less disruptive resolution strategies such as merging with another institution or suspending operations and recapitalizing. Using data on individual state-chartered banks, I find that many of the banks that failed during the panics appear to have been at least as financially sound as banks that were able to use alternative resolution strategies. This result supports the idea that the disruptions caused by the banking panics may have exacerbated the economic downturn. [Emphasis mine]

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