Predicting the Past: Understanding the Causes of Bank Distress in the Netherlands in the 1920s

10 11 2014

Academics are increasingly being encouraged to use social media to promote their research. Christopher L. Colvina,  Abe de Jong, and Philip T. Fliers have raised the bar with a YouTube video that summarizes the key points of their recent article in Explorations in Economic History.

Christopher L Colvin, Abe De Jong, and Philip Fliers. “Predicting the Past: Understanding the Causes of Bank Distress in the Netherlands in the 1920s.” (2014).

Abstract:

Why do some banks fail in financial crises while others survive? This article answers this question by analysing the effect of the Dutch financial crisis of the 1920s on 142 banks, of which 33 failed. We find that choices of balance sheet composition and product market strategy made in the lead-up to the crisis had a significant impact on banks’ subsequent chances of experiencing distress. We document that high-risk banks – those operating highly-leveraged portfolios and attracting large quantities of deposits – were more likely to fail. Branching and international activities also increased banks’ default probabilities. We measure the effects of board interlocks, which have been characterized in the extant literature as contributing to the Dutch crisis. We find that boards mattered: failing banks had smaller boards, shared directors with smaller and very profitable banks and had a lower concentration of interlocking directorates in non-financial firms.

The video raises some damn good questions about the role of the state in bank bailouts. The authors note that the Dutch banking crisis of the 1920s was resolved without taxpayer bailouts. 

 

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