The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931)
Stefano Ungaro - Banque de France
The Institute of Economics will hold a meeting of its Seminar Series on Tuesday, November 3, 2020: Stefano Ungaro from Banque de France will present the paper: The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931).
Do bank runs create real economic damages, rather than simply reflecting the bad shape of the banking system? The author examines the causal effect of bank runs on real economic activity during the French Great Depression (1931-1932) thanks to a key and original feature of this crisis. Depositors withdrew their funds from commercial banks – then unregulated – and deposited them in government-backed savings institutions (Caisses d’épargne). Savings institutions were not allowed to lend, so alternative sources of borrowing were cut at the local level. Our identification is based on the hypothesis that local access to savings institutions increased the probability of bank runs: when panic struck at the national level, expectations were more likely to shift to a bank run equilibrium at the local level if there were safe alternatives to banks for depositors. We use pre-crisis density of savings institutions (i.e. number of accounts per capita) to instrument the growth rate of banking activity during the 1931-1932 crises, at the level of French departments. A 1% decrease in bank branches reduced income by 0.75%. In addition to real effects of bank distress, our study shows how competition between unregulated and safer financial institutions affects financial fragility, which holds important lessons for current banking regulation and the debate on digital central bank currency (CBDC). The existence of safe deposits other than banks can increase the probability of bank runs.
All interested participants are welcome to join online at the following link. External participants need to contact the organisers via email to grant access to the seminar.