Working Paper: NBER ID: w30914
Authors: Charles W. Calomiris; Matthew S. Jaremski
Abstract: Excessively easy bank credit – visible in unusually small credit risk spreads and rapid loan growth – is often posited as a root cause of unsustainable asset price booms. This paper considers whether an increase in bank risk tolerance drove high loan growth that coincided with Florida’s land boom of the mid-1920s, the first Florida housing boom in which buyers from around the nation participated. Estimates suggest that an astounding 20 million lots were offered for sale in Florida at that time. Our detailed narrative and empirical evidence suggest that the facts do not require the assumption of increased risk appetite during the boom. We find that most Florida banks that failed were associated with the Manley-Anthony chain and did not exhibit increases in observable indicators of risk during the boom. Instead, their increases in risk mainly reflected hidden choices either to lend to bank insiders on a preferential basis or to fund other banks that were engaged in such risky and often fraudulent activities. Bank regulators seem to have been complicit in the hidden risk-taking. Even informed investors would have been left in the dark about the amount of risk that was growing in Florida.
Keywords: Florida land boom; bank risk tolerance; asset price booms
JEL Codes: E30; G21; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank risk tolerance (G21) | loan growth (G21) |
| bank failures (G21) | hidden risk-taking behaviors (G41) |
| information asymmetry (D82) | depositors' risk assessments (G21) |
| hidden risk-taking behaviors (G41) | misperceptions of risk (D81) |
| governance structures and lending practices (G38) | misperceptions of risk (D81) |
| lack of critical information (D82) | depositors' risk assessments (G21) |