Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the Early 1900s

19 Pages Posted: 6 Jun 2018 Last revised: 29 Apr 2020

See all articles by Mark A. Carlson

Mark A. Carlson

Board of Governors of the Federal Reserve System

Matthew Jaremski

Utah State University - Huntsman School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-03-09

Abstract

Maintaining sufficient liquidity in the financial system is vital for financial stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.

Keywords: Financial stability, Free-riding, Liquidity requirements, Reserve requirements

JEL Classification: D40, G38, N21, N41

Suggested Citation

Carlson, Mark A. and Jaremski, Matthew, Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the Early 1900s (2018-03-09). FEDS Working Paper No. 2018-018, Available at SSRN: https://ssrn.com/abstract=3187669 or http://dx.doi.org/10.17016/FEDS.2018.018

Mark A. Carlson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Matthew Jaremski

Utah State University - Huntsman School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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