I have been doing research on banking for some time. Much of this research is on “runs on banking systems” which also are called “banking panics”. More recently I have started work on financial crises, partly because of the financial turmoil since July 2007 and ongoing today (April 2008).
Runs on banks or similar institutions are a long-standing problem, going back at least to medieval times and probably back to Ancient Greece or Rome. My research emphasize banking panics and responses to those panics, with much of the research based on nineteenth-century U.S. experience.
I have a couple of papers on these topics written for non-specialists.
“Wildcat Banking, Banking Panics and Free Banking in the United States” Federal Reserve Bank of Atlanta Economic Review 81 (December 1996), 1-20 is a relatively readable discussion of bank runs in the free banking period in the United States.
This also touches on the relationship between electronic money and free banking
Private remedies developed for bank runs. R. Alton Gilbert and I focus on private remedies for bank runs in the National Banking period in “Bank Runs and Private Remedies” Federal Reserve Bank of St. Louis Review 71 (May/June 1989), 43-61.
I gave a speech to the South Florida chapter of the Government Finance Officers Association in February 2008. “The Financial Turmoil in 2007 and 2008” is an Adobe Acrobat copy of the PowerPoint slides. Obviously I said a lot more in an hour than these slides convey, but the slides summarize some basic aspects of the turmoil. The topics at the end – the Florida Government Investment Pool and monoline insurance companies – were of particular interest to the audience of South Florida local government financial officials. There was a run on the Florida Government Investment Pool which was similar analytically to a bank run.
The current financial turmoil also was the subject of a talk to MBA and Law students at the University of Georgia in April 2008. While also titled “The Financial Turmoil in 2007 and 2008”, the slides emphasize a different set of effects. There is no reason to think that UGA students are particularly interested in problems confronting state and local government finance officers! On the other hand, students loans are a natural topic, and they just happened to be much in the news right before the talk. How lucky for me, even if not so great for them. So I talked about why student loans have been affected by the seemingly unrelated “subprime mess.”
The following papers are written primarily for professional economists.
Why do banks promise to pay the face value, or par value, of their liabilities on demand if it is all but certain that they will not honor this promise at an unknown future date? To my mind, the most basic question about banking is a simple one. Banks promise to give you a dollar whenever you want in exchange for you giving them a dollar. Banks keep fractional reserves, which means that they inevitably cannot honor this promise at some point. If enough people want currency at one time, the bank runs out of currency. Sooner or later, enough people come to the bank at one time that the bank cannot honor the promise.
If banks didn’t make this promise, bank runs (called banking panics in the literature) would be impossible. Yet, banks make this promise. Why?
In “Why Do Bank Promise To Pay Par On Demand?”, Margarita Samartín and I summarize the theories and provide some evidence from historical banking. This paper is not merely of historical interest. The analysis shows that money market funds are subject to runs in the same way that banks are, as long as the funds guarantee to pay investors on demand no matter what happens to the value of the underlying assets.
The short answer: Each of the theories explains some historical banking arrangements, but none really explains money market funds of today. Curious, isn’t it? This paper is in press at the Journal of Financial Stability in 2008.
This analysis indicates a key aspect of how electronic money is likely to work if it ever gets off the ground. Today’s money market funds in the U.S. provide an excellent example suggesting that electronic money is likely to be redeemable at par.
While it is easy after the fact to say that banks failed because they were risky, it may not be so obvious before hand. Rik Hafer and I examine banking panics in the free banking period to see whether banks that appear risky before the panic are more likely to fail. We find that banks failing in a panic did appear riskier by general financial criteria before the panic. This is an occasion when the conventional wisdom at the time is correct. This paper, “Bank Failures in Banking Panics: Risky Banks or Road Kill?”, was published in Bank and Financial Market Efficiency: Global Perspectives, volume 5, Research in Banking and Finance, edited by Iftekhar Hasan and William C. Hunter, pp. 47-70. Amsterdam: Elsevier Ltd., 2004.
Runs on the state banking systems occurred in the free banking period. Iftekar Hasan and I document the existence and some implications of bank runs in “Bank Runs in the Free Banking Period.” Journal of Money, Credit, and Banking 26 (May 1994), 271-88. You may be able to access this online. You can get a copy at many libraries or from me.
A suspension of payments is one way to deal with a bank run: in short, just quit paying out. “Suspensions of Payments, Bank Failures and the Nonbank Publics’ Losses” (with Iftekhar Hasan) provides evidence on the effects of suspensions of payments. Our evidence indicates that, if banks are allowed to just quit paying out, fewer banks fail in the end and the final losses to noteholders are less. This is a draft version of the paper published in the Journal of Monetary Economics in 2007. The data on bank failures, losses and related variables are available by sending an e-mail to me.
The primary assets held by these banks were state and federal bonds. Changes in the prices of these bonds were important for the banks. Rik Hafer, Warren Weber and I published a paper that collected these data together. “Weekly U.S. and State Bond Prices.” Historical Methods 32 (Winter 1999), 37-42. You can get a copy of this paper at many libraries or from me. All of the data we used in the paper are available in an Excel spreadsheet. If you’d like the additional available data on Illinois and New York, there is another Excel spreasheet which includes those data.