Working Paper: NBER ID: w27912
Authors: Mark Carlson; Matthew S. Jaremski
Abstract: Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.
Keywords: liquidity requirements; financial stability; freeriding; state banks; national banks
JEL Codes: D40; G38; N21; N41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| State banks with lower cash reserve requirements and located near national banks with higher cash reserves (G21) | State banks hold significantly less cash (G21) |
| Lower cash holdings (G19) | Negative impact on likelihood of state banks' continued operation after the panic of 1907 (F65) |
| Presence of national banks (N11) | State banks' cash holdings (E58) |
| State banks' cash holdings (E58) | Survival likelihood after the panic of 1907 (N22) |