Interbank networks in the national banking era: their purpose and their role in the panic of 1893
BIS Working Papers No 535
The unit banking structure of the United States gave rise to a uniquely important interbank correspondent network, which linked banks throughout the country during the National Banking Era. During normal times, these interbank network relationships provided banks with access to money markets, facilitated payment processing, and helped banks meet legal reserve requirements. We collect and analyze data on individual correspondent relationships of national banks to map the structure of the network, identify the factors that led banks to adopt different correspondent network structures, and examine the consequences of network choices for bank liquidity risk. Banks' network profiles differed according to the range of services they needed or provided to their customers. For instance, banks providing more checking services focused their interbank relationships on banks in New York City, which was central to the payment clearing system. Location characteristics also mattered; banks in areas with more manufacturing firms maintained more network connections. Differences in network profiles propagated liquidity risk during the Panic of 1893, one of the most severe panics of the National Banking Era. Banks with relatively high two-sided interbank liquidity risk - those that both held more of their liquid assets with their correspondents and were funded to a greater extent by the deposits of other banks - were more likely to close. New York City banks suspended convertibility during the crisis. Banks that relied more heavily on New York correspondents as a source of liquidity were more likely to close.
JEL classification: G01, G21, N21
Keywords: interbank networks, correspondent banking, banking panics, contagion, National Banking Era