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What Caused Chicago Bank Failures in the Great Depression? A Look at the 1920s

  • Natacha Postel-Vinay (a1)

Abstract

This article reassesses the causes of Chicago state bank failures during the Great Depression by tracking the evolution of their balance sheets in the 1920s. I find that all banks suffered tremendous deposit withdrawals; however banks that failed earlier in the 1930s had invested more in mortgages in the 1920s. The main problem with mortgages was their lack of liquidity, not their quality. Banks heavily engaged in mortgages did not have enough liquid assets to face the withdrawals, and failed. This article thus reasserts the importance of pre-crisis liquidity risk management in preventing bank failures.

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I am very grateful to my PhD advisors Olivier Accominotti and Albrecht Ritschl for their continuous support and guidance. I would also like to thank Mark Billings, Charles Calomiris, Forrest Capie, Mark Carlson, Nick Crafts, Barry Eichengreen, Alexander Field, John Gent, Bishnupriya Gupta, Frank Kennedy, Joseph Mason, Kris Mitchener, Anne Murphy, Mark Tippett, Stephan Werner, Eugene White, three anonymous referees and seminar participants at the London School of Economics, University of Warwick, Queen's University Belfast, the Canadian Network of Economic Historians Conference in Banff, the Economic History Society Annual Conference in York, the Cliometrics Workshop in Strasbourg, the Economic and Business History Society Conference in Baltimore, and the Economic History Association Annual Meeting in Washington, D.C. Funding from the Economic and Social Research Council is gratefully acknowledged. All errors are mine.

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