Correspondent Banking, Systemic Risk, and the Panic of 1893

Abstract

AbstractDuring the U.S. National Banking Period (1863–1913), a network of correspondent bank relationships created vulnerabilities to bank failures and financial panics. Using data on correspondent relationships for all national, state, savings, and private banks just before the Panic of 1893, along with the precise dates of bank suspensions, we show that prior suspensions of both upstream and downstream correspondents increased the likelihood that a given bank would itself suspend, and that these effects varied over the Panic. Conditional on suspension, banks with prior correspondent suspensions were also more likely to reopen. New York Clearinghouse banks, despite low incidences of actual failure, saw significant balance sheet weakening early in the Panic when downstream respondents suspended, and falling stock prices throughout.