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Predicting the past: Understanding the causes of bank distress in the Netherlands in the 1920s

Author

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  • Colvin, Christopher L.
  • de Jong, Abe
  • Fliers, Philip T.
Abstract
Why do some banks fail in financial crises while others survive? This article answers this question by analysing the effect of the Dutch financial crisis of the 1920s on 142 banks, of which 33 failed. We find that choices of balance sheet composition and product market strategy made in the lead-up to the crisis had a significant impact on banks' subsequent chances of experiencing distress. We document that high-risk banks - those operating highly-leveraged portfolios and attracting large quantities of deposits - were more likely to fail. Branching and international activities also increased banks´ default probabilities. We measure the effects of board interlocks, which have been characterized in the extant literature as contributing to the Dutch crisis. We find that boards mattered: failing banks had smaller boards, shared directors with smaller and very profitable banks and had a lower concentration of interlocking directorates in non-financial firms.

Suggested Citation

  • Colvin, Christopher L. & de Jong, Abe & Fliers, Philip T., 2014. "Predicting the past: Understanding the causes of bank distress in the Netherlands in the 1920s," QUCEH Working Paper Series 14-04, Queen's University Belfast, Queen's University Centre for Economic History.
    • Handle: RePEc:zbw:qucehw:1404
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    Cited by:

    1. Jorge-Sotelo, Enrique, 2022. "Politicians, bankers and the Great Depression: The Spanish banking crisis of 1931," eabh Papers 22-01, The European Association for Banking and Financial History (EABH).
    2. Grodecka-Messi, Anna & Kenny, Seán & Ögren, Anders, 2021. "Predictors of bank distress: The 1907 crisis in Sweden," Explorations in Economic History, Elsevier, vol. 80(C).
    3. Colvin, Christopher L. & Fliers, Philip T., 2021. "Going Dutch: How the Netherlands Escaped its Golden Fetters, 1925-1936," QBS Working Paper Series 2021/06, Queen's University Belfast, Queen's Business School.
    4. Lychakov, Nikita, 2018. "Government-made bank distress: Industrialisation policies and the Russian financial crisis of 1899-1902," QUCEH Working Paper Series 2018-11, Queen's University Belfast, Queen's University Centre for Economic History.
    5. Abe De Jong & Philip T. Fliers, 2020. "Predicting Takeover Targets: Long-Run Evidence from the Netherlands," De Economist, Springer, vol. 168(3), pages 343-368, September.
    6. Colvin, Christopher L., 2017. "Banking on a Religious Divide: Accounting for the Success of the Netherlands' Raiffeisen Cooperatives in the Crisis of the 1920s," The Journal of Economic History, Cambridge University Press, vol. 77(3), pages 866-919, September.
    7. Wilco Legierse, 2023. "Offering Method and Pricing of IPOs: An Analysis of Stock IPOs in the Netherlands, 1918–1939," De Economist, Springer, vol. 171(3), pages 207-238, September.
    8. Abe de Jong & Wilco Legierse, 2022. "What causes hot markets for equity IPOs? An analysis of initial public offerings in the Netherlands, 1876–2015 [Market timing and capital structure]," European Review of Economic History, European Historical Economics Society, vol. 26(2), pages 208-233.

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    More about this item

    Keywords

    financial crises; bank failures; bank business models; interlocking directorates; the Netherlands; the interwar period;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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