Working Paper: NBER ID: w25159
Authors: Matthew S. Jaremski; David C. Wheelock
Abstract: How do banks respond to asset booms? This paper examines i) how U.S. banks responded to the World War I farmland boom; ii) the impact of regulation; and iii) how bank closures exacerbated the post-war bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures experienced larger declines in land prices.
Keywords: banking; agricultural price shock; World War I; bank regulation; bank closures
JEL Codes: E58; N21; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising crop prices (Q11) | entry of new banks (G21) |
| rising crop prices (Q11) | expansion of existing banks' balance sheets (G21) |
| aggressive lending during the boom (G21) | higher probability of closure during the bust (E32) |
| banks with larger shares of portfolios devoted to loans (G21) | higher probability of closure during the bust (E32) |
| counties with significant increases in land values (R52) | higher probability of closure during the bust (E32) |
| deposit insurance (G28) | amplified effects of rising crop prices on loan volumes (Q11) |
| higher minimum capital requirements (G28) | dampened effects of rising crop prices on loan volumes (Q11) |
| aggressive lending during the boom (G21) | increased vulnerability during the bust (F65) |