Banking: Insights From History

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Hyatt Regency Chicago, Michigan 1A & 1B
Hosted By: American Economic Association
  • Chair: Peter Koudijs, Stanford University

Warehouse Banking

Jason Donaldson
,
Washington University-St. Louis
Giorgia Piacentino
,
Washington University-St. Louis
Anjan Thakor
,
Washington University-St. Louis

Abstract

We develop a theory of banking that explains why banks started out as commodities warehouses. We show that warehouses become banks because their superior storage technology allows them to enforce the repayment of loans most effectively. Further, interbank markets emerge endogenously to support this enforcement mechanism. Even though warehouses store deposits of real goods, they make loans by writing new "fake" warehouse receipts, rather than by taking deposits out of storage. Our theory helps to explain how modern banks create funding liquidity and why they combine warehousing (custody and deposit-taking), lending, and private money creation within the same institutions. It also casts light on a number of contemporary regulatory policies.

Investment Banks as Corporate Monitors in the Early 20th Century United States

Carola Frydman
,
Boston University and Northwestern University
Eric Hilt
,
Wellesley College

Abstract

We study the effect of relationships with financial intermediaries on firms' investment decisions and access to external finance. In the early twentieth century, securities underwriters commonly held directorships with American corporations; this was especially true for railroads, the largest enterprises of the era. Section 10 of the Clayton Antitrust Act of 1914 prohibited investment bankers from serving on the boards of railroads for which they underwrote securities, in order to eliminate the bankers' conflicts of interest. Using the volume of underwriting done by bankers on their boards to capture the extent to which railroads were affected by the regulation, we find that following the implementation of Section 10 in 1921, railroads that had maintained close affiliations with underwriters saw declines in their valuations, investment rates and leverage ratios, and increases in their costs of external funds. We perform falsification tests using data for industrial corporations, which were not subject to the prohibitions of Section 10, and find no differential of relationships with underwriters on these firms following 1921. Our results are consistent with the predictions of a simple model of underwriters on corporate boards acting as delegated monitors. Our findings also highlight the potential for regulations intended to address conflicts of interest to disrupt valuable information flows.

The Radio and Bank Distress in the Great Depression

Nicolas Ziebarth
,
University of Iowa

Abstract

I test a coordination game based model of bank runs developed by Angeletos and Werning (2004). I first show that when the fraction of people that receive the public signal increases and the signal is bad, then the number of people demanding their deposits and the probability of a successful attack should increase. I test this prediction using data on the extent of the radio during the high levels of bank distress experienced during the Great Depression. Counties with higher levels of radio penetration rates in 1930 experience higher levels of banking stress between 1930 and 1933. A 10 percentage point increase in radio penetration rates leads to a 4.3 percentage point decline in bank deposits between 1930 and 1933. This correlation remains after controlling for a variety of measures for local economic conditions as well as pre-trends from 1920 to 1930 and an instrumental variables strategy. Though the major distress subsides after 1933, the differential in deposits between counties persists through the end of the sample in 1936.

For richer, for poorer. Banker’s skin-in-the-game and risk taking in New England, 1867-1880

Peter Koudijs
,
Stanford University
Laura Salisbury
,
York University

Abstract

We study whether banks are riskier if managers have less skin-in-the-game. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that reduced skin-in-the-game for newly wedded bankers. We find that banks with managers who married after a legal change were riskier: they had less liquidity and higher leverage, and they were more likely to lose deposits in the 1873-1878 Depression. This effect was most pronounced for bankers with intermediate levels of wealth. We find no evidence that reducing skin-in-the-game increased capital investment at the county level.
Discussant(s)
Saki Bigio
,
University of California-Los Angeles
Francisco Perez Gonzalez
,
Mexico Autonomous Institute of Technology
Rajkamal Iyer
,
Massachusetts Institute of Technology
Daniel Paravisini
,
London School of Economics and Political Science
JEL Classifications
  • G2 - Financial Institutions and Services
  • N2 - Financial Markets and Institutions