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Free Bank Failures: Risky Bonds versus Undiversified Portfolios
Author(s) -
JAREMSKI MATTHEW
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00354.x
Subject(s) - balance sheet , bond , business , closure (psychology) , moral hazard , circulation (fluid dynamics) , hazard , actuarial science , financial system , economics , monetary economics , finance , microeconomics , engineering , biology , incentive , market economy , aerospace engineering , ecology
Almost 30% of the 872 banks established under the Free Banking System (1837–62) are considered failures, unable to reimburse noteholders for the full value of their bank notes upon closure. Lacking sufficient data, economists have focused on one of two general failure explanations: poor regulation design or undiversified bank portfolios. I test both explanations within hazard functions using Warren Weber's annual balance sheet data for almost every antebellum bank. My results suggest that free banking's bond‐secured note issue was the underlying problem, but individual banks could have avoided failure by diversifying their assets with loans and controlling their circulation.