My dissertation investigates the effect of capital requirements on commercial banks and the impact of commercial bank suspensions on the United States economy during the early 20th century.

The first chapter examines the effect of capital requirements on bank stability.

The early 20th century United States provides an opportunity to determine whether imposing capital requirements on commercial banks promotes banking stability in the long run. The structure of the national banking system facilitates inference using a regression discontinuity design. I find that banks subject to higher capital requirements did hold more capital, but also increased lending proportionately so that their leverage and risk of failure remained roughly unchanged. Ultimately, capital requirements did not result in lower suspension rates.

The second chapter investigates the role of national bank capital requirements as a barrier to entry as a case study for California. Previous studies focusing on national banks find that rural bankers operated as price discriminating monopolist. However, by 1900 over half of the banks in the US were state banks. Bank and town level data is gathered for California to explore the impact of capital requirements on banking markets one year after state regulators began implementing capital requirements. The data suggest capital requirements do not alter the composition of capital in local banking markets during this time period. The majority of state banks still held capital levels similar to national banks even when they were subject to lower capital requirements.

The third chapter analyzes the impact of bank failures on wholesale activity at the county-level during the Great Depression. A propensity score model is used to mitigate the endogeneity issue between bank suspensions and wholesale activity. I find that counties experiencing bank suspensions during panic periods experience an eight to ten percent decline in wholesale sales relative to similar counties that did not experience suspensions during panic periods. In addition, data is gathered from bank examiners’ reports to observe which types of bank failures have an adverse impact on wholesale activity. I find banks failing due to asset and withdrawal reasons have a large negative impact on wholesale activity.

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