Micro-evidence from a system-wide financial meltdown: The german crisis of 1931

Abstract

micro-evidence from a system-wide financial meltdown: the german crisis of 1931 by kristian blickle, federal reserve bank of new york markus brunnermeier, princeton university stephan luck, princeton university griswold center for economic policy studies working paper no. 275, june 2020 micro-evidence from a system-wide financial meltdown: the german crisis of 1931 kristian blickle∗, markus brunnermeier†, and stephan luck‡ federal reserve bank of new york; princeton university first version: may 1, 2019; this version: june 15, 2020 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. jel: g01, g21, n20, n24 ∗federal reserve bank of new …

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