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Source: Statements.
Although the exact meaning of each ratio will be discussed in more detail later, this June 1929 snapshot indeed shows the pre-depression weakness of depression failures in Chicago: they had fewer US Treasuries invested as a share of total assets, more real estate loans (which are considered less liquid than other types of loans), more other real estate, and they invested more in banking premises. Other variables often include the reserve-deposit ratio, other bonds and stocks to total assets, due to banks to total assets and bills payable and rediscounts to total assets. Again the same questions come to mind: how long had they
22 Recall that Calomiris and Masons’s (2003) study goes furthest in the analysis of survival duration and dynamics. Nevertheless, as pointed out earlier they fail to analyse the evolution of financial ratios over time, whether in the 1920s or even during the depression, and only look at aggregate results of survival duration.
been carrying these assets? When did the gap between survivors and failures appear? What change in variables rendered failures particularly vulnerable once depression had started? Figures 7 to 11 give answers to the first two questions.
Figure 7 looks at the real estate loan share since 1923 for all five cohorts: survivors, all depression failures, June 1931 failures, June 1932 failures and June 1933 exclusive failures.23 Here it is only given as a link to the previous bar chart. Note, as mentioned before, that the time series for the 1920s should be handled with care, as sometimes the sample size drops by one or two banks, up to a maximum of seven banks. This is necessary if one wants to keep the full sample size for the depression era (see section b).
Figure 7: Real Estate Loan Share, December 1923 to June 1933.
Source: Statements.
23 Later on the “all depression failures” category will be dropped since (as was argued earlier) it is not a very rigorous sample.
Although I am mainly focusing on the pre-depression era here, the rise in the share of real estate loans after June 1929 should not be taken for granted as most banks suffered a large fall in assets. The pre- depression pattern is of great interest, however. First, it appears in general that survivors often had the lowest share during most of the 1920s, followed closely by June 1933 failures. June 1932 failures had a substantially higher share, and the June 1931 failures’ share was even higher. This is outstanding evidence that the earlier the banks failed, the more they had invested in real estate in the previous decade, as early as 1923. Second, all cohorts reach a peak in real estate loan investment between 1925 and 1927, which corresponds to the peak in the real estate boom (see Part III for more information on real estate). June 1932 failures reach the peak later than June 1931 failures, but neither really depart from this peak afterwards, whereas survivors do. In particular, for survivors, the low December 1928 value cannot correspond to a rise in assets at this point since, as can be seen from Figure 2, total assets are relatively low at this point. In other words, survivors invested less in real estate from the beginning, experienced the peak but retreated from this peak more quickly than failures.
Rodkey, a professor of banking and investments writing in 1933, warned against pre-depression excesses, and in particular against excessive investment in real estate mortgages which are “notoriously unliquid [sic]” (Rodkey, 1933, p. 120). In particular, he pointed to many banks’ flawed assumption that the investment of savings deposits (or time deposits) in such assets was justified because of the further assumption that time deposits were a “permanent fund under control of the banking system” (ibid.). He reminded these bankers that during a depression savings depositors withdraw “not only their current interest but also their principal” (ibid.). As Figure 8 shows, during the 1920s, the banks that invested the most in real estate actually also had the highest ratio of real
estate to time deposits, which shows that earlier failures misbehaved even according to their own (flawed) assumptions.24
Figure 8: Real Estate Loans to Time Deposits, Four Cohorts (Excluding the all Depression Cohort).
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