The effects of reconstruction finance corporation assistance on Michigan's banks' survival in the 1930s

Abstract

We examine the effects of the Reconstruction Finance Corporation's (RFC) loan and preferred stock programs on bank failure rates in Michigan during the period 1932–1934, which includes the important Michigan banking crisis of early 1933 and its aftermath. Using a new database on Michigan banks, we employ probit and survival duration analysis to examine the effectiveness of the RFC's loan program (the policy tool employed before March 1933) and the RFC's preferred stock purchases (the policy tool employed after March 1933) on bank failure rates.We find that RFC's purchases of preferred stock—which did not increase indebtedness or subordinate depositors—increased the chances that a bank would survive the financial crisis, but RFC loans did not. Preferred stock assistance not only contributed to loan supply by reducing failure risk; conditional on bank survival, RFC preferred stock assistance was associated with significantly higher lending by recipient banks from 1931 to 1935.