The Origins of Banking Panics: Models, Facts, and Bank Regulation

Empirical research has demonstrated the importance of such institutional structures as branch bank laws, bank cooperation arrangements, and formal clearing houses, for the probability of panic and for the resolution of crisis. The conclusion of this work and cross-country comparisons is that banking panics are not inherent in banking contracts—institutional structure matters. This observation has now been incorporated into new generations of theoretical models. But, while theoretical models sharpen our understanding of how banking panics might have occurred, few of these models have stressed testable implications. In addition, empirical work seeking to isolate precisely which factors caused panics historically has been hampered by the lack of historical data and the fact that there were only a relatively small number of panics. Thus, it is not surprising that research on the origins of banking panics and the appropriate regulatory response to their threat has yet to produce a consensus view.
While the original question of the cause of banking panics has not been answered, at least researchers appear to be looking for the answer in a different place. Our goal in this essay is to evaluate the persuasiveness of recent models of the origins of banking panics in light of available evidence. We begin, in section 4.2, with a definition of a banking panic, followed by a discussion of panics in U.S. history. A brief set of stylized facts which a theory must confront is developed. In section 4.3, recent empirical evidence on panics which strongly suggests the importance of the institutional structure is reviewed. Theories of panics must be consistent with this evidence.

Charles W. Calomiris and Gary Gorton

NBER

January 1991

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