Banking Collapse

TWO DEPRESSIONS, ONE BANKING COLLAPSE

Chay Fisher and Christopher Kent

Research Discussion Paper 1999-06

June 1999 System Stability Department Reserve Bank of Australia

We would like to thank Philip Lowe, Marianne Gizycki, David Merrett, Bryan Fitz-Gibbon, David Gruen and Peter Stebbing for helpful suggestions. Thanks to David Merrett and David Pope for early advice and encouragement. Thanks also to Adrian McMahon for help in preparing this document. Any remaining errors are our own. The views expressed are those of the authors and should not be attributed to the Reserve Bank of Australia.

Abstract
The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression. We show that variation in the performance of the financial sector during the two depressions was due to differences in the condition of the financial sector well before each depression. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector.

JEL Classification Numbers: N10, N20 Keywords: Australian economic depressions, financial instability, banking crises

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Table of Contents
1. 2. Introduction Two Depressions: Output and Banking 2.1 2.2 Output During the Depressions 1890s Banking Collapse versus 1930s Banking Problems 2.2.1 Trading banks 2.2.2 Savings banks 1 3 3 6 9 14 17 18 22 24 26 28 33 35 35 38 38 39 40 41 44 46 49 50 ii

3.

A Comparison of Indicators of Financial System Stability 3.1 3.2 3.3 3.4 3.5 3.6 Investment – Public and Private Speculation in the Property Market Credit Banks’ Balance Sheets and Foreign Borrowing Risk Management – Prudence and Diversification Competitive Pressures

4.

Real

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