Working Paper: NBER ID: w31537
Authors: Kris James Mitchener; Angela Vossmeyer
Abstract: We examine how financial crises redistribute risk, employing novel empirical methods and micro data from the largest financial crisis of the 20th century – the Great Depression. Using balance-sheet and systemic risk measures at the bank level, we build an econometric model with incidental truncation that jointly considers bank survival, the type of bank closure (consolidations, absorption, and failures), and changes to bank risk. Despite roughly 9,000 bank closures, risk did not leave the financial system; instead, it increased. We show that risk was redistributed to banks that were healthier prior to the financial crisis. A key mechanism driving the redistribution of risk was bank acquisition. Each acquisition increases the balance-sheet and systemic risk of the acquiring bank by 25%. Our findings suggest that financial crises do not quickly purge risk from the system, and that merger policies commonly used to deal with troubled financial institutions during crises have important implications for systemic risk.
Keywords: financial crises; risk redistribution; Great Depression; bank mergers; systemic risk
JEL Codes: C3; E44; G21; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crises (G01) | redistribution of risk (H23) |
| acquisition of a bank (G21) | balance sheet and systemic risk of acquiring bank increases (F65) |
| bank closures and mergers (G21) | systemic risk (E44) |
| largest 100 banks (G21) | change in systemic risk (F65) |
| 77 banks that did not engage in acquisitions (G21) | reduced systemic risk (G33) |