Title

Micro-evidence from a System-wide Financial Meltdown: The German Crisis of 1931

Author(s)

Kristian Blickle Kristian Blickle (Federal Reserve Bank of New York )

Markus Brunnermeier Markus Brunnermeier (Princeton University)

Stephan Luck Stephan Luck (Princeton University)

Abstract

This paper studies a major financial panic, the run on the German banking system in 1931, to distinguish between banking theories that view depositors as demanders of liquidity and those that view them as providers of discipline. Our empirical approach exploits the fact that the German Crisis of 1931 was system-wide with cross-sectional variation in deposit flows as well as bank distress and took place in absence of a deposit insurance scheme. We find that interbank deposit flows predict subsequent bank distress early on. In contrast, wholesale depositors are more likely to withdraw from distressed banks at later stages of the run and only after the interbank market has started to collapse. Retail deposits are—despite the absence of deposit insurance—largely stable. Our findings emphasize the heterogeneity in depositor roles, with discipline being best provided through the interbank market.

Creation Date

2020-06

Section URL ID

Paper Number

275

URL

https://gceps.princeton.edu/wp-content/uploads/2021/06/275_Brunnermeier-1.pdf

File Function

Jel

G01, G21, N20, N24

Keyword(s)

Germany

Suppress

false

Series

3