WHY DO BANKS FAIL - EVIDENCE FROM THE 1920S

This paper examines the causes of rural bank failures during the 1920s using a newly created state-level data series. By focusing on rural b anks we are able to investigate the impacts of agricultural distress a nd government policies on the class of banks accounting for 80% of the failures in the decade. Failure rates were highest where farm acreage and land values had increased the most before 1920 because these regi ons suffered the worst agricultural distress subsequently. Agricultura l distress caused more bank failures in states with deposit insurance systems, suggesting that insurance encouraged banks to increase risk a s their net worth declined. (C) 1994 Academic Press, Inc.