Bank Supervision, Regulation, and Instability During the Great Depression

Even after controlling for local economic conditions, differences in state bank supervision and regulation contribute toward explaining the large variation in state bank suspension rates across U.S. counties during the Great Depression. More stringent capital requirements lowered suspension rates while laws prohibiting branch banking and imposing high reserve requirements had the opposite effect. States that endowed bank supervisors with the authority to liquidate banks minimized contagion and credit-channel dislocations and experienced lower suspension rates. Those that gave their supervisors sole authority to issue bank charters and that granted their supervisors long terms strengthened the incentives for bank lobbyists to influence supervisory decisions and consequently experienced higher rates of suspension.