Working Paper: NBER ID: w22064
Authors: Gary Gorton; Ellis W. Tallman
Abstract: “Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
Keywords: No keywords provided
JEL Codes: E02; E32; E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TBTF policies (G28) | stability of the banking system (G21) |
| emergency lending by clearinghouses (E58) | stability of the banking system (G21) |
| large interconnected banks receiving aid during crises (F65) | prevention of runs on large banks (E44) |
| clearinghouses' willingness to assist large banks (G21) | preservation of overall system integrity (E61) |
| failure of significant banks (F65) | broader financial instability (F65) |
| failure of smaller banks (F65) | less systemic response (P50) |