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Débats Économiques Et Financiers N°37

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Débats Économiques Et Financiers N°37 Débats économiques et financiers N°37 The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931) Eric Monnet*, Angelo Riva† and Stefano Ungaro‡ *EHESS, Paris School of Economics and CEPR , [email protected] †European Business School Paris and Paris School of Economics, [email protected] ‡Autorité de Contrôle Prudentiel et de Résolution – Banque de France, [email protected] SECRÉTARIAT GENERAL DE L’AUTORITÉ DE CONTRÔLE PRUDENTIEL ET DE RÉSOLUTION DIRECTION D’ÉTUDE ET D’ANALYSE DES RISQUES LES EFFETS REELS DES RUEES BANCAIRES : L’EXEMPLE DE LA GRANDE DEPRESSION EN FRANCE (1930-1931)4 Eric Monnet, Angelo Riva et Stefano Ungaro Mai 2021 Les points de vue exprimés dans ces Débats Économiques et Financiers n’engagent que leurs auteurs et n’expriment pas nécessairement la position de l’Autorité de Contrôle Prudentiel et de Résolution. Ce document est disponible sur le site de l’Autorité de Contrôle Prudentiel et de Résolution : acpr.banque-france.fr The opinions expressed in the Economic and Financial Discussion Notes do not necessarily reflect views of the Autorité de Contrôle Prudentiel et de Résolution. This document is available on acpr.banque- france.fr 4This research has benefited from research funds granted by the Agence Nationale de la Recherche. Grant Number: ANR‐15‐CE26‐0008 & ANR-17-EURE-0001. We thank Sofiane Bouarif, Victor Degorce, Hadrien Clausse, Emilie Bonhoure, João Castello Branco for excellent research assistance, as well as Pierre-Cyrille Hautcoeur, Germán Forero Laverde, Thomas Breda, Patrice Baubeau, Kris Mitchener, Victor Degorce, Gary Gorton, Eugene White, Jean-Bernard Chatelain, Fabio Braggion, Francesco Manaresi, Guillaume Vuillemey, Paul Dutronc-Postel, and participants at the Financial History Workshop at Goethe University, Paris School of Economics, Sorbonne Alliance Finance Seminar, Institute of Economics of Sant'Anna School of Advanced Studies Seminar, and the Economic History Association 2020 Conference for helpful discussions. The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931) Abstract: We investigate the causal impact of bank runs by exploiting a key feature of the French Great Depression (1930-1931) that created exogenous geographical variations in the withdrawals of bank deposits. Unregulated commercial banks coexisted with government-backed saving institutions (Caisses d’épargne). During the crisis, depositors who had an account in Caisses d’épargne were more likely to withdraw from banks. Pre-crisis density of Caisses d’épargne accounts was unrelated to economic and bank characteristics. Using this variable as an instrument, we find that a 1% decrease in bank branches reduced aggregate income by 1%. Our identification highlights how a shift of deposits towards safer institutions can affect financial fragility. It holds lessons for current financial regulation and the design of central bank digital currency (CBDC). Keywords: bank runs, flight-to-safety, banking panics, Great Depression JEL Classification: E44, E51, G01, G21, N14, N24 Les effets réels des ruées bancaires : l’exemple de la Grande Dépression en France (1930- 1931). Résumé : Nous étudions l’impact causal des paniques bancaires en exploitant une caractéristique essentielle de la Grande Dépression française (1930-1931) qui entraîna des variations géographiques exogènes des retraits des dépôts bancaires. Les banques commerciales, non réglementées, coexistaient avec les Caisses d’Épargne, régulées par l’État. Pendant la crise, les déposants titulaires d’un compte dans les Caisses d’épargne étaient plus susceptibles de retirer leurs dépôts des banques. La densité des Caisses d’Épargne au niveau départemental avant la crise n’était pas liée aux caractéristiques économiques et bancaires du département. En utilisant cette variable comme instrument, nous constatons qu’une baisse de 1 % des guichets bancaires réduisit le PIB local de 1 %. Notre identification montre comment un transfert des dépôts vers des institutions plus sûres peut affecter la stabilité financière. Elle permet également de tirer des enseignements pour la réglementation financière actuelle et pour la conception des monnaies digitales de banque centrale (CBDC). Mots-clés : ruées bancaires, fuite vers la sécurité, paniques bancaires, Grande Dépression JEL Classification : E44, E51, G01, G21, N14, N24 Non-Technical Summary Do bank runs impact economic activity? Banking theory considers that runs may be motivated by fundamentals or noisy information, but leaves room for contagious panics leading to real eects that are independent of pre-crisis economic and bank fundamentals. From an empirical point of view, however, the real eects of bank runs are very challenging to estimate. Such diculties might be interpreted as evidence that genuine bank runs - independent from the quality of assets - are in fact either benign or even non-existent. This is rst because of the straightforward reverse causality issue between credit crunch and economic crisis. Second, borrowers (rms or house- holds) can nd alternative sources of nancing, whether debt or equity, to compensate for the stop in bank lending. In this paper, we identify the causal eect of bank runs on real economic activity during the French Great Depression (1930-1931). Our identication strategy exploits a key and original feature of this crisis and the French interwar banking system more generally – namely, the existence of safe alternatives to banks and their heterogeneous establishment across the country – that generated an exogenous variation in the probability of bank runs. Our study is conducted at the departmental level (France was divided into 90 departments), with yearly data. Banking activity is measured by the number of bank branches (the only statistics on banks avail- able at the local level over this period). Moreover, we have reconstructed a new measure of real GDP for the French departments in the interwar period, based on comprehensive tax data. Start- ing early November 1930, French depositors – households and rms – suddenly withdrew their funds from commercial banks all across the country. French banks were still unregulated at that time (the rst banking laws were passed in 1941). Depositors transferred the funds withdrawn from banks to savings institutions (Caisses d’épargne ordinaires, or CEOs). Contrary to banks, CEOs were regulated and they beneted from the guarantee of the government, and they were not allowed to lend to households and rms, nor to provide payment services. We hypothesize that the pre-crisis density of CEO accounts at the local level increased the probability of bank runs, in a way that was independent of the health of local banks. Because CEO deposits were as liquid as bank deposits, people who already had a CEO account had incentives to withdraw their deposits from banks as soon as uncertainty emerged at the national level. The pre-crisis density 1 of savings institutions (measured by the number of CEO accounts per capita) was heterogeneous across departments and randomly distributed for historical reasons unrelated to local economic performances and bank characteristics. CEOs were not allowed to lend (they could only hold government securities), so other sources of borrowing were cut at the local level. We, therefore, use the pre-crisis density of the CEOs to instrument the growth rate of bank branches during the crisis. Using this method, we nd a strong eect of a decline in banking activity on GDP. A 1% decrease in bank branches caused a drop in income by about 1% per year between 1929 and 1932. A back-of-the-envelope calculation suggests that our identied causal eect of bank runs may explain one-third of the drop in real GDP in 1930-1931. Besides studying the real eects of bank runs, our paper shows how competition between unregulated and safer nancial institu- tions aects nancial stability. This holds important lessons for current banking regulation and the debate on digital central bank currency. Résumé non technique Les ruées bancaires ont-elles un impact sur l’activitééconomique ? La théorie nancière considère que les paniques bancaires peuvent être dues aux caractéristiques des banques et à l’information imparfaite des déposants, mais elle donne aussi une place à des paniques bancaires contagieuses qui peuvent avoir des eets réels indépendants des fondamentaux économiques et bancaires. D’un point de vue empirique, cependant, les eets réels des paniques bancaires sont très di- ciles à estimer. De telles dicultés peuvent être interprétées comme la preuve que d’authentiques paniques bancaires – indépendantes de la solvabilité des banques – sont en fait bénignes voire même inexistantes. Cela s’explique tout d’abord par le problème de causalité inverse entre crise bancaire et crise économique. Deuxièmement, les emprunteurs (entreprises ou ménages) peuvent trouver d’autres sources de nancement, qu’il s’agisse de dette ou de fonds propres, pour com- penser la baisse des prêts bancaires. Dans cet article, nous identions l’eet causal des ruées ban- caires sur l’activité économique réelle durant la Grande Dépression française (1930-1931). Notre stratégie d’identication exploite une caractéristique essentielle et originale de cette crise et plus généralement du système bancaire français d’entre-deux-guerres, à savoir l’existence d’alternatives 2 sûres aux dépôts bancaires, et l’hétérogénéité de l’implantation de ces alternatives dans le pays. Cette caractéristique implique une variation exogène
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