BANK FAILURE CONTAGION IN HISTORICAL-PERSPECTIVE

Bank failures are contagious due to the lack of bank-specific information. Depositors who lack financial information on individual banks make withdrawal decisions based on the condition of the banking system as a whole. A high ratio of bank failures then signals an adverse condition within the banking sector and triggers systemwide bank runs. This paper looks at bank panics in U.S. history and shows the importance of solvency information specific to individual banks. The major empirical finding is that the government or banks stopped bank panics mainly by providing financial information on banks. © 1991.