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Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression

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Abstract

The paper uses a unique set of Depression-era bank financial data in a two-step system of equations with instrumental variables to estimate the effectiveness of lender of last resort (LOLR) strategies in a survival model with self-selection bias. Decreasing RFC loan collateral requirements over 1932–1933 facilitate the analysis of a relationship between LOLR collateral and survival. The results suggest that the RFC's practice of subordinating depositors' and investors' interests through senior claims on banks' best assets may have caused banks to fail. Although recapitalization after March 1933 helped banks survive the Great Depression, recapitalization is not a typical LOLR strategy.

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  1. Joseph R. Mason
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Mason, J.R. Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression. Journal of Financial Services Research 20, 77–95 (2001). https://doi.org/10.1023/A:1011151710007

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