Bank Panics, Government Guarantees, and the Long‐Run Size of the Financial Sector: Evidence from Free‐Banking America

Abstract

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Sovereign Risk and Fiscal Information: A Look at the U.S. State Default of the 1840s

“…To shed some light, the bottom panel of Table 1 displays the percentage of debt held by U.S. investors and by foreign investors in the 1850s, both from primary and second markets. Although government bonds were a common asset used for securing U.S. bank notes in the free banking era (1837-1863) [see, for example, Rolnick and Weber (1984) and Chabot and Moul (2014)], state banks do not appear to be the central source of credit for state governments at the time. In 1841, total bank assets held under the category "state and local government bonds" by all banks was less than 7% of total outstanding state debt.…”

Sovereign Risk and Fiscal Information: A Look at the U.S. State Default of the 1840s

“…Southern states tended to have larger shares of foreign creditors than Northern and Western states. For instance, in 1853, estimates suggest foreign shares of Mississippi, Alabama, and Louisiana debt were 100, 98, and 83 percent respectively [see Wilkins (1989) Rolnick and Weber (1984) and Chabot and Moul (2014)], state banks do not appear to be the central source of credit for state governments at the time. In 1841, total bank assets held under the category "state and local government bonds" by all banks was less than 7% of total outstanding state debt.…”

Government Intervention and Financial Sector Development

“…Easy availability of funds and government guarantees may also make public banks less risk averse enabling more credit (Ivashina and Scharfstein 2010;Coleman and Feler 2015). On the role of government guarantees and trust in the financial system, Chabot and Moul (2014) examined the consequences of failed government guarantee in the Indiana state in US in the historical context. They concluded that loss of trust in the regulatory regime had negative long run consequences on the financial depth of the state.…”