Working Paper: CEPR ID: DP13416
Authors: Sanjiv Das; Kris James Mitchener; Angela Vossmeyer
Abstract: We study how bank regulation interacts with network topology to influence systemic stability. Employing unique hand-collected data on the correspondent network for all U.S. banks on the eve of the Great Depression and a methodology that captures bank credit risk and network position, we explore how the pyramid-shaped network topology was inherently fragile and systemically risky. We measure its contributionto banking distress in the early 1930s, and show that a bank's network position as well as the risk of its network neighbors are strong predictors of bank survivorship. Institutional alternatives, such as branch banking, and alternative topologies appear to deliver networks that are more stable than the network that existed in 1929.
Keywords: systemic risk; banking networks; great depression; peer effects; branch banking; model comparison
JEL Codes: L1; E42; E44; G01; G18; G21; N12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pyramid-shaped network topology (D85) | Banking distress (F65) |
| Network position and risk of network neighbors (D85) | Bank survivorship (D14) |
| Random topology instead of pyramid structure (D85) | Bank survival (G21) |
| Branch banking (G21) | Predicted probability of bank survival (G21) |
| Reducing balance sheet risk by one standard deviation (G32) | Predicted probability of survival (C41) |