Predicting the past: Understanding the causes of bank distress in the Netherlands in the 1920s

Abstract

Why do some banks fail in financial crises while others survive? This article answers this question by analysing the effect of the Dutch financial crisis of the 1920s on 142 banks, of which 33 failed.We find that choices of balance sheet composition and product market strategy made in the lead-up to the crisis had a significant impact on banks' subsequent chances of experiencing distress. We document that high-risk banks -those operating highly-leveraged portfolios and attracting large quantities of deposits -were more likely to fail. Branching and international activities also increased banks' default probabilities. We measure the effects of board interlocks, which have been characterized in the extant literature as contributing to the Dutch crisis. We find that boards mattered: failing banks had smaller boards, shared directors with smaller and very profitable banks and had a lower concentration of interlocking directorates in non-financial firms.

Exceptional big linkers: Dutch evidence from the 20th century

“…In the earlier years the directors were appointed by financiers and in particular representing the interests of shareholders and banks (De Jong et al, 2014). Eventhough the official appointments were made at the shareholders' meetings, banks were requiring board representation when providing significant loans to firms (Colvin, De Jong, & Fliers, 2015). From the 1950s onwards, the direct influence of shareholders over board appointments gradually reduced.…”

“…Second, the Van Oss Effectenboek is a contemporary investor manual. The manual was published annually from 1903 until 1978 and includes balance sheets, profit and loss statements, share information, and information on the distribution of profits (see Colvin et al (2015) and Westerhuis and De Jong (2015) for descriptions of the adjustments to the accounting data). Third, the Tabel -Der laagste en hoogste koersen provides information on stock prices and dividends.…”

Banking on a Religious Divide: Accounting for the Success of the Netherlands' Raiffeisen Cooperatives in the Crisis of the 1920s

“…It was 22 This estimate includes only losses from banks that failed outright, not those that survived through merger or restructuring; true losses were even higher (Colvin, De Jong, and Fliers 2015). It approximates to 1.2 billion 2010 euros, or 708 billion after taking account of the increased size of the Dutch economy.…”

“…cial crisis that affected hundreds of banks to varying degrees (Colvin, De Jong, and Fliers 2015). Evidence of this crisis include large writeoffs, depositor runs, share price crashes, bankruptcies, and state interventions.…”

“…Many farmers had little experience with new mutually-owned banking organizations. But by the eve of the 1920s crisis, approximately 18 percent of Dutch people, perhaps every rural 3 Thus despite 1 Calculated using data from Colvin, De Jong, and Fliers (2015). 2 The Dutch language does not distinguish between the verbs "to lend" and "to borrow."…”