Bank Fragility and the Financial Crisis: Evidence from the US Dual Banking System

This paper compares the stability of the US Dual Banking system’s two bank groups, national and state banks, in light of the current financial crisis. The goal of the paper is to answer three distinct questions: first, is there a difference in the (balance sheet-) fragility between the two groups and, second, to what extent has the balance sheet fragility of both groups changed after the beginning of the financial crisis beginning in 2007? Building on that, the third question asks to whether or not the respective regulatory agencies of both bank groups are responsible for these changes in balance sheet fragility in light of the financial crisis. To answer these questions the paper uses US Call Report data containing full quarterly balance sheets and P&Ls of all US commercial banks over the period 2000-2008. Univariate and multivariate difference-in-difference methodology focusing on the immediate pre-crisis period Q1/2005 to Q3/2007 and the crisis period Q3/2007 to Q4/2008 is applied. Highly significant and robust results show that, ceteris paribus, national banks reduced their potential balance sheet fragility after the escalation of the crisis in August 2007 by reducing lending and liquidity creation. JEL Classification: E44, G01, G21, G28