Journal Article

The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk

Abstract: This Economic Commentary describes the collapse and subsequent bailout of the Detroit-headquartered Bank of the Commonwealth in 1972. Commonwealth failed because it invested heavily in long-duration, fixed-rate municipal securities in the mid-1960s in a bet that interest rates would decline. Instead, with the beginning of the Great Inflation of 1965–1980, rates rose. Liquidity problems then ensued, and the bank approached failure. Unable to find an acquirer because of Michigan’s banking restrictions, regulators instead bailed out the bank because of fears of contagion. This article also compares the collapse of Commonwealth with the spring 2023 failures of Silicon Valley Bank and First Republic. In particular, I discuss structural changes in banking that impacted the speed of the runs and the pools of potential acquirers.

Keywords: Bank failures; interest rate risk; Silicon Valley Bank (SVB); bank regulation; Banking History;

https://doi.org/10.26509/frbc-ec-202406

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Commentary

Publication Date: 2024-03-25

Volume: 2024

Issue: 06

Pages: 9