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Abram Piatt Andrew (1908)
Substitutes for Cash in the Panic of 1907, 22
Franklin Allen, Douglas Gale (2007)
Understanding Financial Crises
Maintaining sufficient liquidity in the financial system is vital for its 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.
Journal of money credit and banking – Wiley
Published: Feb 1, 2023
Keywords: reserve requirements; liquidity requirements; free‐riding; financial stability
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