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Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock
Author(s) -
JAREMSKI MATTHEW,
WHEELOCK DAVID C.
Publication year - 2020
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/jmcb.12725
Subject(s) - bust , boom , balance sheet , shock (circulatory) , asset (computer security) , economics , financial system , monetary economics , capital requirement , business , finance , market economy , engineering , medicine , computer security , environmental engineering , computer science , incentive
How do banks respond to asset booms? This paper examines (i) how U.S. banks responded to the World War I farmland boom; (ii) the impact of regulation; and (iii) how bank closures exacerbated the postwar bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures experienced larger declines in land prices.