Quantitative Financial History

at Cornell University

Cite as:

Baron, M., Verner, E., & Xiong, W. (2021). Banking Crises Without Panics. Quarterly Journal of Economics, 136(1). 51-113.

Banking Crises Without Panics

Matthew Baron, Emil Verner, and Wei Xiong

Quarterly Journal of Economics

We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress with and without banking panics. To do this, we construct a new data set on bank equity returns and narrative information on banking panics for 46 countries over the period of 1870 to 2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. Although panics are an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We use bank equity returns to uncover a number of forgotten historical banking crises and create a banking crisis chronology that distinguishes between bank equity losses and panics.

Cite as:

Baron, M., & Dieckelmann, D. (2021). Historical Banking Crises: A New Database and a Reassessment of their Incidence and Severity. In: Leveraged: The New Economics of Debt and Financial Fragility. University of Chicago Press, forthcoming.

Historical Banking Crises: A New Database and a Reassessment of their Incidence and Severity

Matthew Baron and Daniel Dieckelmann

Book chapter in: Leveraged: The New Economics of Debt and Financial Fragility. University of Chicago Press. (ed.: Moritz Schularick)

We highlight limitations with existing chronologies of banking crises and showcase new approaches for reconstructing and analyzing the global history of banking crises. We review recent quantitative approaches to ask: When did banking crises happen and how severe were they? Building on the chronology of banking crises put forth by Baron, Verner, and Xiong (2021), we present a new database of the causes, timeline, bank failures, creditor panics, policy responses, and consequences of banking crises in 47 countries since 1870.

Cite as:

Baron, M., Laeven, L., Penasse, J., & Usenko, Y. (2024). Permanent Capital Losses after Banking Crises. Working paper.

Permanent Capital Losses after Banking Crises

Matthew Baron, Luc Laeven, Julien Pénasse, and Yevhenii Usenko

Using a database of stock returns and policy interventions across banking crises in 46 economies since 1870, we analyze the persistence of bank distress and the effectiveness of policy interventions in restoring bank capitalization. We find that bank stocks experience large, permanent declines at the onset of crises, which predict long-term declines in cash flows and book values and low future equity returns. Further analyses show that bank losses in crises are primarily due to asset quality deterioration, not early liquidation during panics. Forceful liquidity-based interventions predict only small, temporary increases in bank market value. Overall, our findings indicate that banking crises stem primarily from fundamental losses rather than temporary illiquidity or discount rate effects. Government recapitalizations have historically been small and delayed, leading to persistent bank undercapitalization. Overall, policy interventions have generally not been successful in restoring bank value after crises.

Cite as:

Baron, M., & Muir, T. (2020). Intermediaries and Asset Prices: International Evidence since 1870. Review of Financial Studies, 35.5 (2022): 2144–2189.

Intermediaries and Asset Prices: International Evidence since 1870

Matthew Baron and Tyler Muir

Review of Financial Studies

We study data on commercial banks and securities firms across multiple countries since 1870. Balance sheet expansion of leveraged intermediaries negatively predicts returns (stocks, bonds, currencies, housing). The predictability is stronger at shorter horizons, is robust to macroeconomic controls, and holds outside distress periods, in contrast to models featuring nonlinearities during distress. Intermediaries in global financial centers predict currency and international equity returns. A new dataset on individual stock holdings of Japanese intermediaries since 1955 shows intermediaries have large effects on stocks directly held. Our results suggest a strong universal link between intermediaries and asset returns distinct from macroeconomic channels.

Cite as:

Baron, M. (2020). Countercyclical Bank Equity Issuance. Review of Financial studies, 33(9). 4186–4230. 

Countercyclical Bank Equity Issuance

Matthew Baron

Review of Financial Studies

Over the period 1980-2012, large U.S. commercial banks raise and retain less equity during credit expansions, which amplifies their leverage. The decrease in equity issuance is large relative to subsequent banking losses. I consider a variety of explanations for why banks resist raising equity and find evidence consistent with the diminishment of creditor market discipline due to government guarantees. I test this explanation by analyzing the removal of government guarantees to German Landesbank creditors and find that creditor market discipline and equity issuance increase. These findings help explain why banks resist raising equity, making financial distress more likely.

Cite as:

Baron, M., & Xiong, W. (2017). Credit expansion and neglected crash risk. Quarterly Journal of Economics, 132(2), 713-764. 

Credit Expansion and Neglected Crash Risk

Matthew Baron and Wei Xiong

Quarterly Journal of Economics

By analyzing 20 developed economies over 1920–2012, we find the following evidence of overoptimism and neglect of crash risk by bank equity investors during credit expansions: (i) bank credit expansion predicts increased bank equity crash risk, but despite the elevated crash risk, also predicts lower mean bank equity returns in subsequent one to three years; (ii) conditional on bank credit expansion of a country exceeding a 95th percentile threshold, the predicted excess return for the bank equity index in subsequent three years is −37.3%; and (iii) bank credit expansion is distinct from equity market sentiment captured by dividend yield and yet dividend yield and credit expansion interact with each other to make credit expansion a particularly strong predictor of lower bank equity returns when dividend yield is low.

Cite as:

Baron, M., Brogaard, J., Hagströmer, B., & Kirilenko, A. (2019). Risk and return in high-frequency trading. Journal of Financial and Quantitative Analysis, 54(3), 993-1024. 

Risk and Return in High-Frequency Trading

Matthew Baron, Jonathan Brogaard, Björn Hagströmer, and Andrei A. Kirilenko

Journal of Financial and Quantitative Analysis

We study performance and competition among firms engaging in high-frequency trading (HFT). We construct measures of latency and find that differences in relative latency account for large differences in HFT firms’ trading performance. HFT firms that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies, including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Cite as:

Agarwal, I., & Baron, M. (2024). Inflation and Disintermediation. Journal of Financial Economics, forthcoming.

Inflation and Disintermediation

Isha Agarwal and Matthew Baron

Journal of Financial Economics (accepted)

We test a bank credit channel through which unexpected increases in inflation lead to short-run macroeconomic fluctuations. For identification, we study an unexpected U.S. inflation increase in early 1977 and exploit differences in state-level reserve requirements for Federal Reserve nonmember banks, which create differences in banks’ inflation exposures. More exposed banks reduce lending, lowering local house prices and construction employment. We provide evidence for potential mechanisms, including a bank net wealth and a loan misallocation channel. Our results suggest that an important consequence of inflation is its impairment of the banking sector.

Cite as:

Dieckelmann, D. (2021). Market sentiment, financial fragility, and economic

activity: The role of corporate securities issuance. School of Business & Economics

Discussion Paper, No. 2021/06. Freie Universität Berlin.

Market Sentiment, Financial Fragility, and Economic Activity: The Role of Corporate Securities Issuance

Daniel Dieckelmann

Working Paper

Using new quarterly U.S. data for the past 120 years, I show that sudden reversals in equity and credit market sentiment approximated by several measures of corporate securities issuance are highly predictive of banking crises and recessions. Deviations in equity issuance from historical averages also help to explain economic activity over the business cycle. Crises and recessions often occur independently of domestic leverage, making the credit-to-GDP gap a deficient early-warning indicator historically. The fact that equity issuance reversals predict banking crises without elevated private credit levels, suggests that changes in investor sentiment can trigger financial crises even in the absence of underlying banking fragility.