The Founding of the Federal Reserve, the Great Depression, and the Evolution of the U.S. Interbank Network

Abstract

Financial network structure is an important determinant of systemic risk. This article examines how the U.S. interbank network evolved over a long and important period that included two key events: the founding of the Federal Reserve and the Great Depression. Banks established connections to correspondents that joined the Federal Reserve in cities with Fed offices, initially reducing overall network concentration. The network became even more focused on Fed cities during the Depression, as survival rates were higher for banks with more existing connections to Fed cities, and as survivors established new connections to those cities over time.

Financial Stability Policies and Bank Lending: Quasi-Experimental Evidence from Federal Reserve Interventions in 1920-21

“…The network data allows me to check whether the interbank connections of treated banks in my sample could have induced SUTVA violations in my local discontinuity models. Consistent with the pyramid structure of the U.S. interbank network structure at the time Anderson et al, 2018;Jaremski and Wheelock, 2020b), I find that links to local banks across the 13 Aiyar et al (2014) show that time-varying, bank-specific capital requirements were effective in harnessing credit growth in the United Kingdom but also led to regulatory arbitrage via non-regulated banks. Reinhardt and Sowerbutts (2017) document differential regulatory arbitrage behavior in a large cross-country panel, depending on the type of macroprudential tool used.…”

Interbank connections, contagion and bank distress in the Great Depression✰

“…Previous studies do not indicate any motivation for assortative matching. Studies such as Paddrik, Anderson, and Wang (2019) and Jaremski and Wheelock (2018) show that the network connections between respondents and correspondents were driven by common legal requirements from state regulators, the Comptroller of the Currency, and the structure of the Federal Reserve System rather than idiosyncratic bank-specific choices. These connections tended to be long-established and tied to financial centers, and their main purpose was to transfer deposits (seasonally) from peripheral banks to financial center banks.…”

Shareholder Liability and Bank Failure

“…39 Most banks that were not Fed members met their reserve requirements in part by holding interbank deposits at correspondent banks in (central) reserve cities. In addition, Fed member banks deposited excess reserves at correspondent banks as they paid higher interest than reserves at the Fed (Mitchener and Richardson 2019, Jaremski and Wheelock 2020, Anderson, Erol and Ordoñez 2020.…”