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Federal Reserve Bank of St. Louis
Working Papers
Interbank Connections, Contagion and Bank Distress in the Great Depression
Charles W. Calomiris
Matthew Jaremski
David C. Wheelock
Abstract

Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network risk, suggesting that banks expected the Fed to reduce network risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression.


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Charles W. Calomiris & Matthew Jaremski & David C. Wheelock, Interbank Connections, Contagion and Bank Distress in the Great Depression, Federal Reserve Bank of St. Louis, Working Papers 2019-1, 01 Jan 2019.
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Keywords: Bank Contagion; Great Depression; Interbank Networks; Liquidity Risk; Federal Reserve System
DOI: doi.org/10.20955/wp.2019.001
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