Fundamentals, Panics and Bank Distress During the Depression

This paper provides the first comprehensive econometric analysis of the causes of bank distress during the Depression. We assemble bank-level data for Fed member banks, and combine those data with county-level, state-level, and national-level economic characteristics to capture cross-sectional and inter-temporal variation in the fundamental determinants of bank failure. We find that fundamentals explain most of the incidence of bank failure, and argue that quot;contagionquot; or quot;liquidity crisesquot; were a relatively unimportant influence on bank failure risk prior to 1933. At the national level, we find that the first two banking crises identified by Friedman and Schwartz in 1930 and 1931 are not associated with positive unexplained residual failure risk, or with changes in the importance of liquidity measures for forecasting bank failures. The third banking crisis they identify is a more ambiguous case, but even if one views it as a bona fide liquidity crisis, the size of the contagion effect could not have been very large. The last banking crisis they identify - at the beginning of 1933 - is associated with important, unexplained increases in bank failure risk. We also investigate the potential role of regional or local contagion and illiquidity for promoting bank failure and find some evidence in support of such effects, but these are of small importance in the aggregate