Are banks that fail in banking panics the riskiest ones prior to the panics? The free banking era in the United States provides useful data to examine this question because the assets held by the banks were traded at the New York Stock Exchange. The authors estimate the ex ante riskiness of a bank’s portfolio by examining the portfolio relative to mean-variance frontiers and by examining the bank's leverage and notes relative to assets. The authors find that the ex ante riskiness of a bank’s portfolio helps predict which banks fail and the extent of noteholders’ losses in the event of failure.
JEL classification: G21, G28, E58, N21
Key words: banking panics, bank failure, banking regulation, portfolio risk
Earlier versions of this paper were presented at the Universidad de Málaga, the Universidad Carlos III de Madrid, Texas Tech University, Tilburg University, and the VIII Tor Vergata Financial Conference on Financial Crises. The authors thank the seminar participants, Scott Hein, Larry Wall, and the anonymous referees for comments that substantially improved the paper. Research assistance from Shalini Patel and Daniel Waggoner is appreciated. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Gerald P. Dwyer, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-7095, 404-498-8810 (fax), email@example.com, or R.W. Hafer, Southern Illinois University, Building 2, Room 3136, Edwardsville, Illinois 62026, 618-650-2747, firstname.lastname@example.org.
Use the WebScriber Service to receive e-mail notifications about new papers.