Working Paper: NBER ID: w18427
Authors: Charles W. Calomiris; Joseph R. Mason; Marc Weidenmier; Katherine Bobroff
Abstract: This paper examines the effects of the Reconstruction Finance Corporation's (RFC) loan and preferred stock programs on bank failure rates in Michigan during the period 1932-1934, which includes the important Michigan banking crisis of early 1933 and its aftermath. Using a new database on Michigan banks, we employ probit and survival duration analysis to examine the effectiveness of the RFC's loan program (the policy tool employed before March 1933) and the RFC's preferred stock purchases (the policy tool employed after March 1933) on bank failure rates. \n\nOur estimates treat the receipt of RFC assistance as an endogenous variable. We are able to identify apparently valid and powerful instruments (predictors of RFC assistance that are not directly related to failure risk) for analyzing the effects of RFC assistance on bank survival. We find that the loan program had no statistically significant effect on the failure rates of banks during the crisis; point estimates are sometimes positive, sometimes negative, and never estimated precisely. This finding is consistent with the view that the effectiveness of debt assistance was undermined by some combination of increasing the indebtedness of financial institutions and subordinating bank depositors. We find that RFC's purchases of preferred stock - which did not increase indebtedness or subordinate depositors - increased the chances that a bank would survive the financial crisis. \n\nWe also perform a parallel analysis of the effects of RFC preferred stock assistance on the loan supply of surviving banks. We find that RFC assistance not only contributed to loan supply by reducing failure risk; conditional on bank survival, RFC assistance is associated with significantly higher lending by recipient banks from 1931 to 1935.
Keywords: No keywords provided
JEL Codes: G01; G18; G21; G28; N12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RFC assistance (F53) | bank survival (G21) |
| RFC's loan program (G51) | bank failure rates (G21) |
| RFC's loan program (G51) | increased indebtedness (F65) |
| RFC's loan program (G51) | increased failure risk (G33) |
| RFC's preferred stock purchases (G24) | bank survival (G21) |
| RFC assistance (F53) | higher loan supply (E51) |