DP16054 The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931)

Author(s): Eric Monnet, Angelo Riva, Stefano Ungaro
Publication Date: April 2021
Keyword(s): bank runs, banking panics, flight-to-safety, Great Depression
JEL(s): E44, E51, G01, G21, N14, N24
Programme Areas: Financial Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16054

We investigate the causal impact of bank runs by exploiting a key feature of the French Great Depression (1930-1931) that created exogenous geographical variations in the withdrawals of bank deposits. Unregulated commercial banks coexisted with government-backed saving institutions (Caisses d'épargne). During the crisis, depositors who had an account in Caisses d'épargne were more likely to withdraw from banks. Pre-crisis density of Caisses d'épargne accounts was unrelated to economic and bank characteristics. Using this variable as an instrument, we find that a 1% decrease in bank branches reduced aggregate income by 1%. Our identification highlights how a shift of deposits towards safer institutions can affect financial fragility. It holds lessons for current financial regulation and the design of central bank digital currency (CBDC).