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Working Paper 1991-006A

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"Regulation and Bank Failures: New Evidence from the Agricultural Collapse of the 1920s"
by David C. Wheelock

This article examines the contribution of government policies to the high number of bank failures in the United States during the l920s. I consider the state of Kansas, which had a system of voluntary deposit insurance and where branch banking was strictly prohibited, and find that bank failure rates were highest in counties suffering the greatest agricultural distress and where deposit insurance system membership was the highest. The evidence for Kansas illustrates how prohibitions on branch banking caused unit banks to be especially susceptible to local economic shocks, and suggests that, despite regulations to limit risktaking, deposit insurance caused more bank failures than would have occurred otherwise.

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Category > Banking
Author > David C. Wheelock