Working Paper: NBER ID: w28870
Authors: Haelim Anderson Kinda; Cheryl Hachem; Simpson Zhang
Abstract: We study financial stability with constraints on central bank intervention in a model with belief-driven bank runs. A pecuniary externality arises in the decentralized market for interbank loans and leads to excessively many bank failures. A forced reallocation of liquidity across banks improves social welfare and can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. A new dataset constructed from archival records reveals that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.
Keywords: liquidity; banking crisis; clearinghouse loan certificates; Panic of 1873
JEL Codes: D53; D62; E42; E50; G01; N21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Issuance of loan certificates (H81) | Reduced bank failures (G28) |
| Issuance of loan certificates (H81) | Improved social welfare (D69) |
| Issuance of loan certificates (H81) | Better allocation of liquidity (G19) |
| Issuance of loan certificates (H81) | Mitigated negative impact on stock prices (G10) |
| Liquidity pressure (E41) | Issuance of loan certificates (H81) |