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Bank Runs With and Without Bank Failure

Sergio Correia, Stephan Luck, Emil Verner

TL;DR

This paper uses a novel newspaper-based microdataset of 4,049 bank run episodes (1863–1934) to analyze the causes and consequences of bank runs in the United States. By linking run events to bank balance sheets, macro conditions, and local economic indicators, the authors document that runs are more likely in banks with weak fundamentals but can occur in strong banks as well; however, runs translate into bank failure predominantly when fundamentals are weak. They show that strong banks survive runs through mechanisms such as interbank cooperation, equity injections, and suspensions of convertibility, while weak banks experience larger deposit and credit contractions, especially when failures accompany runs. The results challenge the view that liquidity shocks alone cause large economic distress, instead highlighting the central role of bank solvency in amplifying or containing the real-economy effects of bank distress.

Abstract

We study the causes and consequences of bank runs using a novel dataset on bank runs in the United States from 1863 to 1934. Applying natural language processing to historical newspapers, we identify 4,049 runs on individual banks. Runs are considerably more likely in weak banks but also occur in strong banks, especially in response to negative news about the real economy or the broader banking system. However, runs typically only result in failure for banks with weak fundamentals. Strong banks survive runs through various mechanisms, including interbank cooperation, equity injections, public signals of strength, and suspension of convertibility. At the local level, bank failures (with and without runs) translate into substantially larger declines in deposits and lending than runs without failures. Our findings suggest that poor bank fundamentals are necessary for bank runs to translate into failure and for bank distress to generate severe economic consequences.

Bank Runs With and Without Bank Failure

TL;DR

This paper uses a novel newspaper-based microdataset of 4,049 bank run episodes (1863–1934) to analyze the causes and consequences of bank runs in the United States. By linking run events to bank balance sheets, macro conditions, and local economic indicators, the authors document that runs are more likely in banks with weak fundamentals but can occur in strong banks as well; however, runs translate into bank failure predominantly when fundamentals are weak. They show that strong banks survive runs through mechanisms such as interbank cooperation, equity injections, and suspensions of convertibility, while weak banks experience larger deposit and credit contractions, especially when failures accompany runs. The results challenge the view that liquidity shocks alone cause large economic distress, instead highlighting the central role of bank solvency in amplifying or containing the real-economy effects of bank distress.

Abstract

We study the causes and consequences of bank runs using a novel dataset on bank runs in the United States from 1863 to 1934. Applying natural language processing to historical newspapers, we identify 4,049 runs on individual banks. Runs are considerably more likely in weak banks but also occur in strong banks, especially in response to negative news about the real economy or the broader banking system. However, runs typically only result in failure for banks with weak fundamentals. Strong banks survive runs through various mechanisms, including interbank cooperation, equity injections, public signals of strength, and suspension of convertibility. At the local level, bank failures (with and without runs) translate into substantially larger declines in deposits and lending than runs without failures. Our findings suggest that poor bank fundamentals are necessary for bank runs to translate into failure and for bank distress to generate severe economic consequences.
Paper Structure (51 sections, 14 equations, 26 figures, 16 tables)

This paper contains 51 sections, 14 equations, 26 figures, 16 tables.

Table of Contents

  1. Introduction
  2. Related Literature
  3. Roadmap
  4. Conceptual Framework
  5. Causes of Runs and Implications for Bank Failure
  6. Broader Economic Consequences of Runs and Failures
  7. Data
  8. Novel Bank Distress Events Database
  9. Concepts and Definitions
  10. Sources
  11. Methodology
  12. Episode Types
  13. Measurement Issues
  14. Additional Data Sources
  15. Bank Runs in the US, 1863-1934
  16. ...and 36 more sections

Figures (26)

  • Figure 1: Bank Run, Suspension, and Failure Episodes
  • Figure 2: Bank Runs With and Without Failure, National Banks, 1863-1934
  • Figure 3: Probability of Bank Runs With and Without Failure for National Banks During and Outside of Banking Crises
  • Figure 4: Probability of Bank Runs by Bank Fundamentals
  • Figure 5: Pass-Through of Runs to Failure across Deciles of Bank-Specific Fundamentals
  • ...and 21 more figures