Finance and Economics Discussion Series

Alternatives for Distressed Banks and the Panics of the Great Depression

Mark Carlson
2008-07

Abstract: Several studies have explored whether the banking panics of the Great Depression caused some institutions to fail that might otherwise have survived. This paper adopts a different approach and investigates whether the panics resulted in the failure and liquidation of banks that might otherwise have been able to pursue a less disruptive resolution strategies such as merging with another institution or suspending operations and recapitalizing. Using data on individual state-chartered banks, I find that many of the banks that failed during the panics appear to have been at least as financially sound as banks that were able to use alternative resolution strategies. This result supports the idea that the disruptions caused by the banking panics may have exacerbated the economic downturn.

Keywords: Great Depression, banking panics, distressed banks