Economic Effects of Runs on Early ‘Shadow Banks’: Trust Companies and the Impact of the Panic of 1907

Frydman, Carola; Hilt, Eric; Zhou, Lily Y.

doi:10.2139/ssrn.2117552

Cited by 19 publications

(21 citation statements)

References 54 publications

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“…Calomiris and Carlson (2017) show that the suspensions of NYC banks during the Panic of 1893 caused liquidity issues at interior banks in the West. Frydman, Hilt, and Zhou (2015) examine the Panic of 1907 and find that initial losses that originated from NYC led to reduced corporate investments at connected institutions and suspensions at commercial banks throughout the country.…”

Section: Bottommentioning

confidence: 99%

Bank Networks and Systemic Risk: Evidence from the National Banking Acts

Anderson

Paddrik

Wang

2019

American Economic Review

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The National Banking Acts (NBAs) of 1863–1864 established rules governing the amounts and locations of interbank deposits, thereby reshaping the bank networks. Using unique data on bank balance sheets and detailed interbank deposits in 1862 and 1867 in Pennsylvania, we study how the NBAs changed the network structure and quantify the effect on financial stability in an interbank network model. We find that the NBAs induced a concentration of interbank deposits at both the city and bank levels, creating systemically important banks. Although the concentration facilitated diversification, contagion would have become more likely when financial center banks faced large shocks. (JEL E44, G01, G21, G28, L14, N21)

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Section: Bottommentioning

confidence: 99%

Bank Networks and Systemic Risk: Evidence from the National Banking Acts

Anderson

Paddrik

Wang

2019

American Economic Review

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“…Another strand of the banking literature has used financial crises (Peek and Rosengren 2000;Schnabl 2012;Chodorow-Reich 2014;Frydman, Hilt, and Zhou 2015) or the failure of large institutions (Fernando, May, and Megginson 2012;Lin 1 For example, Enriques (2000) and Djankov et al (2008) document the treatment of self-dealing by directors by the legal systems of a variety of countries.…”

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confidence: 99%

Investment Banks as Corporate Monitors in the Early Twentieth Century United States

Frydman

Hilt

2017

American Economic Review

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We study the effect of financial relationships on firms ' Access to external finance among firms is an important determinant of economic growth, yet financial frictions arising from asymmetric information often impede this process. To mitigate these frictions, firms in many countries around the world form affiliations with financial intermediaries, which enable the intermediary to obtain information and monitor management. However, these affiliations may also be costly for firms: theoretical models suggest that intermediaries can use their informational monopoly to hold up firms and charge high interest rates or fees, thereby distorting investments (Sharpe 1990;Rajan 1992). The extent to which financial relationships foster or hinder growth is therefore an empirical question. Although a substantial literature has documented correlations between financial affiliations

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“…Because it took place in an era of weak corporate governance law, highly variable accounting practices, and essentially no regulation of stock markets -all compounded by rudimentary information technology -traders faced a continual threat of informational contagion (e.g., Bernstein et al (2014)) and difficulties in assessing counterparty risk (see Frydman et al (2012) 3 ). In the environment of October 1907, market participants could only see a general decline in market prices, combined with plummeting United Copper stock prices and the failure of a major brokerage house, followed by news of illiquidity and then runs on several associated banks and trust companies and spikes in short term borrowing (call money) rates.…”

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confidence: 99%

Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907

Fohlin

Gehrig

Haas³

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. and 1910, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 -one of the most severe financial crises of the 20th century. We estimate that the market run drove up spreads from 0.5% to 3% during the peak of the crisis and, using a spread decomposition, we identify information risk as the largest component of illiquidity. Terms of use: Documents inInformation costs rose most in the mining sector -the origin of the stock corner and a sector with among the worst track records of corporate governance and accounting. We find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Despite short-term cash infusions into the market, the market remained relatively illiquid for several months following the peak of the panic. Notably, market illiquidity risk is priced in the cross section of stock returns. Thus, our findings demonstrate how opaque systems allow idiosyncratic rumors to spread and amplify into a long-lasting, market-wide crisis.JEL-Codes: G000, G140, N000, N200.

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Economic Effects of Runs on Early ‘Shadow Banks’: Trust Companies and the Impact of the Panic of 1907

Cited by 19 publications

References 54 publications

Bank Networks and Systemic Risk: Evidence from the National Banking Acts

Bank Networks and Systemic Risk: Evidence from the National Banking Acts

Investment Banks as Corporate Monitors in the Early Twentieth Century United States

Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907

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