Flight-to-Safety and the Credit Crunch: A New History of the Banking Crisis in France During the Great Depression

Baubeau, Patrice; Monnet, Éric; Riva, Angelo; Ungaro, Stefano

doi:10.2139/ssrn.3285119

Cited by 5 publications

(3 citation statements)

References 49 publications

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“…In other words, when the prevailing interest rate rises, banks require a higher ratio of secured to unsecured loans. This is the familiar flight-to-quality behavior of banks (Baubeau, Monnet, Riva, & Ungaro, 2018). Section 5 shows how flight-to-quality is reflected on the balance sheets of businesses.…”

Section: Agency Cost Collateral and Credit Constraintsmentioning

confidence: 96%

Supply of bank loans and business debts: A view from historical bankruptcy cases

Xie

Hansen

2020

Rev Financ Econ

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As bank loans fell in the 2008 crisis, business bankruptcy increased. To study how bank loans affect business balance sheets and bankruptcy, we use new data on bankrupt businesses in Missouri between 1898 and 1942. We confirm that when banks curtail loans, courts see more bankruptcies among businesses with high exposure to bank debt. To reduce real volatility, policy‐makers can set tough bank liquidity requirements in the upswing of business cycle but allow weaker requirements in the downswing. We also find that between 1914 and 1933, businesses in St. Louis were more sensitive to changes in bank loans than businesses in Kansas City, probably due to the tight monetary policy conducted by the conservative St. Louis Fed. The Glass‐Steagall Act weakened the relationship between bank loans and business debt structure. The takeaway is that lender‐of‐last‐resort practices stabilize both the financial sector and the real economy.

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Section: Agency Cost Collateral and Credit Constraintsmentioning

confidence: 96%

Supply of bank loans and business debts: A view from historical bankruptcy cases

Xie

Hansen

2020

Rev Financ Econ

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“…In the early 1930s, during the Great Depression, several large deposit banks were close to failure, and those were rescued and merged with other banks. Indeed, the global financial crisis had a significant impact on French banks (Baubeau et al 2021). A severe credit crunch affected them, with a movement of deposits away from banks toward savings institutions and the central bank.…”

Section: Overview Of French Banking Systemmentioning

confidence: 99%

“…In addition, this chapter includes an account of the supervisory regime before the Act of 1941, since recent research suggests that the financial crisis of the 1930s had a much more significant impact on French banks than the literature had so far acknowledged (Baubeau et al 2021).…”

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confidence: 99%

France: Credit Control and Formalization of Banking Supervision

Hotori

Wendschlag

Giddey

2021

Formalization of Banking Supervision

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The banking supervision in France was formalized with the Banking Acts of 1941 and of 1945. In 1941, the Banking Control Commission as the supervisory agency was created, and rigid financial regulation such as a minimum capital requirement and a separation of banking types was introduced. In connection to the 1941 Act, the four largest commercial banks in France were also nationalized. However, with the German occupation and the wartime situation, the formalization of banking supervision was only completed with the Banking Act of 1945. The essential contents of the 1941 Act were upheld, but the supervisory agency was given a lot of measures to enforce bank regulation. Especially, authorization of rigid penalties enhanced effectiveness of supervisory activities. The main drivers of the formalization of banking supervision in France were the policy measures undertaken during the Vichy regime and the Liberation Government's measures. In the post-Second World War era, the banking supervisory system was used mainly to enforce credit control policy actions, in a period of economic recovery and reconstruction. The banking act of January 1984 decompartmentalized the banking system and changed the institutions of supervision.

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Flight‐to‐safety and the credit crunch: a new history of the banking crises in France during the Great Depression†

Baubeau

Monnet

Riva

et al. 2020

The Economic History Review

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Despite France's importance in the interwar world economy, the scale of the French banking crises of 1930–1 and their consequences have never been fully assessed quantitatively. The lack of banking regulation severely limited the availability of balance sheet data. Using a new dataset of individual balance sheets from more than 300 banks, this article shows that the crises were much more severe than previously thought, although they did not affect the main commercial banks. By reconstructing financial flows, this study shows that the fall in bank credit was mostly driven by a flight‐to‐safety by deposits, from banks to savings institutions and the central bank. The decrease in bank deposits due to bank runs was offset by an increase in deposits with savings institutions, with the central bank, and in cash hoarding, whereas the decrease in bank credit was not offset by an increase in loans from non‐bank financial institutions. In line with the gold standard mentality, cash deposited with savings institutions and the central bank was used to decrease marketable public debt and increase gold reserves, rather than pursuing countercyclical policies. Despite massive capital inflows and rising aggregate money supply, France suffered from a severe, persistent credit crunch.

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Flight-to-Safety and the Credit Crunch: A New History of the Banking Crisis in France During the Great Depression

Cited by 5 publications

References 49 publications

Supply of bank loans and business debts: A view from historical bankruptcy cases

Supply of bank loans and business debts: A view from historical bankruptcy cases

France: Credit Control and Formalization of Banking Supervision

Flight‐to‐safety and the credit crunch: a new history of the banking crises in France during the Great Depression†

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