PREVENTING A REPEAT OF THE
Trang 2Preventing a Repeat of the Money Market Meltdown of the Early 1930s John V, Duca’ Vice President and Senior Policy Advisor
Research Department, Federal Reserve Bank of Dallas P.O Box 638906, Dallas, TX 75265 (214) 922-5154, john v.duewdi Phong and Southern Methodist University, Dallas, TX ‘April 2009 (revised November 2009)
‘This paper analyzes the meltdown of the commercial paper market during the Great Depression, and relates those findings to the recent financial criss, Theoretical models of financial frictions and information problems imply that lenders will make Fewer non-
collateralized loans or investments and relatively more extensions of collateralized finance in times of high isk premiums This study investigates the relevance of such theories tothe Great Depression by analyzing whether the imereased use of a collateralized form of business lending, (bankers acceptances) relative to that of non-collteralized commercial paper ean be
ceconometically attributable to measures of corporate ereditfinaacal risk premiums Because ‘commercial paper and bankers acceptances ae short-lived, they are more timely measures ofthe availabilty of short-term credit than are bank or business Failures and the level or growth rate of | the stock of bank loans, whose matuttes were often longer and were renegotable- In this way, the study adds to the literature on financial market Irctions during the Great Depression, which aside from analyzing securities prices, typically investigates the behavior ofcredit-elated variables that lag curent conditions, such as bank failures, bankruptcies, the stock of money, oF ‘outstanding bank foans In particular, the real level of bankers acceptances and their use relative to non-
collateralized commercial paper were strongly and positively related to spreads between corporate and treasury bond yields Also significant were short-run events, such a the October 1929 stock market rash and the 1933 bank holiday episode that sparked flights to quality inthe bbond market and a flight to collateral (As) in the money market and pethaps away from the loan market Furthermore, these shifts in the composition of extemal finance were large ‘supporting the view that financial fictions and reduced credit availability may have played an important rae in depressing the U.S economy’ during the 1930s, The paper also relates these Findings to the current financial crisis by examining how the relative use of commercial paper reacted to yield spreads during the current crisis, taking into account Federal Reserve actions to improve liquidity condition inthe money markets, Results
suggest that these efforts may have, at least sofa, helped prevent the commercial paper market from melting down tothe extent seen during the early 1930s,
JEL, Classification Codes: B43, B50,
Trang 3‘This paper analyzes the meltdown ofthe commersal paper market during the Great Depression and relates those Findings tothe recent financial eis, particulary’ with respect 0 Federal Reserve and Treasury efots to improve liuidity conditions in the money markets “Theoretical models of financial feetions imply tha ereit extensions wil shift tom sky to safer
borrowers if economic Factors increase default risk or increase the cost of loanable funds wia
uid csk premiums (eg, Bernanke and Blinder, 1988; Bernanke and
Gener: 1989; Bemanke, Getler, and Gils, 1996; Jaffee and Russ, 1976: Keeton, 1979 Lang and Nakamura, 1995; and Súgliz and Weiss, 1981) Based on these implications, post ‘Weld War Il data onthe composition of business credit has bean used to assess the eeevance of suc theories, dating back Wat leas Jae and Movin (1969), who assess the composition cofbunk business Lending, and extending to reeet ste, such as Kashyap, Wileos, and Stein
(1983), who analyze the reatve use of commercial paper and bank loans This iterate
especialy the Migi-to quality model of Lang and Nskamata (1995) and the financial aocelerator approach of Berar, Gener, and Gilerist (19%), implies that lenders wll make fewer nom secured loans and extend elaively more collateralized fiance in times of high default risk
Swiis ofthe curent isis maybe hampered by what some may misperceve aa lack of bistrial precedent, but the current study provides an analysis of he elative use of commecial
peper daring the Great Depression ta shed light on how the money markets have heen feted by the current crisis also provides evidence tht Fed Treasury efforts may have (G0 f4r) prevented the commercial paper market fom imploding onthe eal that itd in 1932, In general, empires studies ofthe impact of Financial Fetons and monetary Factors daring the
1930s have focused on examining the links between bank filurestloans and economic asivity
(Bernanke, 1985 and Calominis and Mason, 200:
the source and impact ofthe in the money supply (Boughton and Wicker, 1979, Friedman and Schwarz, 1963, and Hamilton,
Trang 4(Field, 1984; and Wheelock, 1990), the ol of unanticipated deflation (Hamilton, 1987), of inks between default isk spreads and economic growth (Bernanke, 1983), Although the credit and financial fetons literature, particulary the financial accelerator work of Bernanke and Genter (1989) and Berane, Geter, and Gilchủs (1996) is pardy motivated bythe Great Depression, there are no published studies that empirically analyze the composition of business ret extensions during the ora, pal reflecting a lack of data on imely measures of external Finance
‘The current paper fills pat ofthis gap by investigating whether the increased use of a
collateralized form of business lending (bankers acceptances, B.As)elative to that of non- collateralized commercial paper during the Great Depression (Figure 1) can he eonometicdly attibutable toindieatrs of coeporte credit sk and the isk of bank uns, For robustness, these
Financial factors ate assessed in models ofthe levels and ist differences of rel bankers
acceptances In addition to the default and liquidity risk premiums in eorporate-Treasury vield spreads, the risk oF bank runs may also have encouraged the use of BAS, The main reason is that
Trang 5in rss, banks had the option of borrowing aginst o selling BAS othe Federal Reserve, ‘Which committed ise? to rediscounting BAS and commercial paper held by hanks and whose silty to rediscount nk assets was limited 0 these types of paper until the Banking Act of
1038, Asa esl, BAS were mare liquid than other bank asses But the Fed's conduct oF pen rarket operation in BAS and discounting BAs lowered the liquidity risk of investing in BAS,
[By implication, the relative use of BAs asa source of exteral finance should he increas
int) icasures of eomporate-Tw suy ri spross, which blond daft se and liquidity sn, and (2) possibly measres ofthe sak of bank rans, uch asthe curreney-to-dopot ratio Nevertheless, these are reasons hy higher hank sun isk may not induce greater use of BAS This papers
sclted to Bernanke's (1983) empirical Findings that two proses Por the destruction of Fnancil intermediation during the Depression, deposits of suspended banks and labiliis of filing businesses, were signiicant in explaining changes in industriel production in te presence of ‘money growth, Bemanke also referenced finding that a pros’ for default sk, the spread
bbeween yields on Baa and Ans-rated corporate bonds, was also statistically sig
‘or industil production, but was als highly collinear with oer indicators oF financial distess Although Bemanke discussed how deflation destroyed collateral and thereby plausibly reduced the availability of credit, the literature has not direct assessed whether the ‘composition of business finance during tae Great Depression was affected by rising isk
pvenloms and bank run isk in ways consistent with theories of financial fitions
“The sunent study tess whether an empirical implication ofthe ere inancal fictions channel is casistent with Bernanke's finding that Financial fietions were macro-conomically ‘nxportant, This sty also uses mare imely data on basiness nance than hes been often used in studying the Great Depression, Because commercial paper and bankers acceptances are short lived, they ate more timely indicators ofthe availability of extemal finance than are bank ot
Trang 6‘hich have been analyzed in much ofthe htestre on the Great Depression A particular problem with analyzing outstanding bank fons is hat bankers may have given voobled
borrowers mor ime to epay loans or delayed wens ofoans, Asa result, growth in she stack cof bank loans may net give a consistent nor timely indication ofthe availability of new eri
Consistent witha financial fietions channel, bankers aecepances—real or retative to commercial paper—ae increasing inthe spreads between investmentgrade corporte snd
‘Treasury bond yields, Such spreads are used to gaus cris premiums, without breaking them ow ito expected default losses and changes in the price of deal nd iguiity snk [Terni (1976) argues that wider corporate quality spreads reflects heighened isk of ines failures rather than ight iguidity cantons | Because the mosey market and corporate spread variables exhiit dit and nonstationary using the Greet Depression a, cointegration lenis ae ‘sed, Given the short matures of bankers acceptances and commercial paper, ests imply tha viskpreniums persistelly afected the composition and availabilty of external finance
To relate these iin othe cutrnt isis, his study also analyzes the cureat isis Owing to the deepening of financial and credit markets, and the Fed's shift toward conducting ‘pen market operations in Treasury and agency deb, bankers acceptances have become a tivial
source of domestic finance Instead, the paper-bank loan mix (Kashyap, Wileoy, and Stein,
1992) is model
to see how the same Baa-Treasury spread usc inthe Greet Depression sample is related tothe composition of shorter husines ince in the current crisis Renlts sugee ‘hat ations taken since Oetober improve liquidity i the money markets may have helped prevent the commercial paper market from imploding by as much asit did in the erly 1930s
“This study is opanized as follows, Seetion 2 provides dtl about bankers acceptances aid hypotheses about their use daring the Great Depression, Secion 3 presents the data and
Trang 7Fiquidity programs may have prevented she commercial paper market from collapsing The conclusion relates the findings forthe Great Depression with those onthe curentctsis
Det and Hypotheses Regarding Bankers Acceptances and Commercial Paper What Are Bankers Acceptances and What Purposes Do They Serve?
‘A bankers acceptance is atime drat drain on a bank to finance the shipment or storage ‘of goods A draft is “aovepted’ when a bank guarantes payment to the holdes This makes the
[BA tradeabe in securities markets bectuse the issuing bank unconditionally promises payment (othe investor at a specified date regandless of whether the yoods-buying firm repays the bank and because investors usually have better information about the bank than the goods purchaser “The goods-buying im essentially receives funding to pay the seller from a bank, whet Funds
the extension by selling the bankers acceptance From the perspecive of banks guaranteeing 'BAs, the goods purchased or held in inventory colatealize the BAS Thos, extending BAS ails less default sisk than making sn unsecured lan to fem of similar ered quality Why Risk Premiums May Affect The Use of Bankers Acceptances
hooves of credit and financial ection imply that lenders wold pressure horrowers for ‘more collateral, hich s relevent for the BA market during ant era when fins had fewer
financi ‘options Goods sllers, for instance, may be reluctant to uive trade credit for an extended period toa x
aphically distant customer who i unable to pay within the cash discount pei because they have limited access to extemal finance In such ens, the seller ‘nay pressure the buyer to pay using funds from a BA issued by the buyer's bank The byes bank may be more willing to ssue BA than an unsecured Ioan sing othe ference in celaeral or because thas beter information about te buyers eredit qty and can signal this {© BA investors in an incentive-compatible way by suaranteeing (accepting) the BA
In addition, i he event that the goods buying fim doesnot repay, the Buyer's bank may
Trang 8goods-seling fim However, the exta pape an legal work in creating aBA versus e standard fon suagess that many borrowers would be better off with foam unless the bank requires collateral thatthe bortower could not provide absent a BA or unless the value of ellateral induces banks to offer loan rates on unsecured loans above those on BAS, These fetorsimly thatthe relative use of BAS increases with macro default isk, while that of commercial paper ‘would, consistent ith the ratios plotted in Figure | and real levels shows in Figure 2!
Why Liquidity Rsk May Affect The Use of Bankers Acceptances
Another atuactive aspect of BAs was hanks’ ability sell BAs, which made BAs easier ‘of han business loans for which deposits were needed (Duield and Summers 1981) The BA market was very liquid the 1920s and 1930s because the Federal Reserve condaced open snark operations in it (Federer, 2003) and Small and Clouse, 2006) For this reason, BA issuance ued the impact ofthe risk of bank deposit ans on te banks’ bility to meet customer eredit needs An adiional funding advantage was tha banks Were requied to hold reserves against deposits needed to fund leans, but ao against BA that they issued and sod
Furthermore, even if hanks held BAs they issued, BAs were more liquid than loans Prior
eas collateral for discount
+9 1932, only commercial paper and BAs held by banks were eli
founs; and it was not until late 1935 that the Federal Reserve allowed some types af loans 0 serve as collateral for discount loans In 1932, Congress granted the Federal Reserve limited
temporary authority w rediscount promissory notes secure to the satisfaction ofthe Pederal Reserve under the Glass-Steagall Act The Federal Reserve interpreted this provision as giving it
limited authority to accept government securities as well as commercial paper and BAS as collateral for discount loans (The New Vouk Clearinghouse Associaton, 1953, p76)? The
Zac baked commeral paperiselavey new Unlike BAs which wv olaraiad ty me poo mab
Likely reflecting ths lmded chenge al the Fed, dun variable conteliag Cor this ited and temporary
Trang 9Figure 2: During Depression Era, Real Levels of Domestic Bankers Acceptances ose With Risk Spreads While Commercial Paper Tends to Fall „„,
reuoeomte Be fa
[Banking Act of 1935 gave the Federal Reserve permanent authority to rediscount promissory notes secured by’ any sound asset, In response, the Federal Reserve explicitly expanded the types of eligible asses to include FHA and other satisfactory mortgages, installment credit, and US
government and municipal securities (p 34-35, Hunt, 1940) This Act was introduced in January 1938 and passed in August 1935, ‘The provisions about assets liibe for rediscounting ‘were not controversial unlike thse about open market operations and the make-up ofthe Federal Reserve Board (Burns, 1974) Likely relecting an aniipated easing of rediscounting eligibility hich reduced the relative attractiveness of holding BAs, the stock of BAs declined rapidly ealy that year Accordingly, some specifications include dummy variables fo this regime shit
Why Bank Run Risk May Affect The Use of Bankers Acceptances
“These considerations imply that the relative use of BAS may also rise with the risk of
Trang 10‘quaroates sepayent of principal and implied interest epardess of whether the goods-buying, firm repays the issuing bank That sid, confidence in the value af ths gurantee may be Low ‘when she risk of bank failures is high, Finally testing or the impact of hank rn rik would be appropriate ifthe analysis focused on otal BAS, Hoviever, in this study detecting any efeet may be cficuleosause the analysis focuses on Bs tat finance domestic commerce—which were
not the bulls of total BAs—to Focus on financial fictions effects on domestic borrowing Why Liquidity and Bank Rum Risk May Also Affect The Use of Commercial Paper
‘The impact of defaulea liguidty isk on BA use may have been relevant to the Great
`
Depression era, when borrower defn risk nd the iguidity risk pose hy bank rans encou banks o shift ther polis toward less shy assets (Calon and Mason, 2008), These types of isk may have also affected the relative use of comercial paper and bankers acceptances, both of which ate highly liquid snd have shor-maturies Sine the mid1970s,un-bscked commercial paper hasbeen issued by fiems who pose nealigible detail isk in Hine with
Diamond, 1991), Firms issuing paper are wpically required by the market ta have back-up ines fbank credi that eliminate most liquidity risk associated with their abit to pay on time
For vo reasons, hoseever, higher default ea igi risk daring the Grest Depresion also plausibly made BAs a more feasible source f external Finance than commercial pape
First, even highly ded paper issuers pose default risk in that unusual era which preceded
she asset-backed commercial paper market and during which the creitratings of many ighly rated firms had been eut by ratings agencies (Wigsnore, 1985) Secon it was not unl the Ite
1970s, when large banks had acess to wellaeveloped, large tine deposit and otber funding snakes tha paper-issung fms could easily and normally obtain ines of bank ereit tobeck up thei issuance of paper Thus, when soacems about quit risk rose dramatically, they may
Trang 11U1 Data and Variables
Bankers Acceptances and Commercial Paper
Federal Reserve data are used to construct the ratio of bankers aecepranees to commercial
"
peper (ACP), Both components were seasonally adjusted using a multiplictiv
procedure, which yielded a rato that was similar had the ratio ater than the components besa seasonally adjusted The advantage of separately adjusting each component is hat he same resulting BA series is used to constact areal BA series thats also modeled The BA series that is analyzed excludes BAs used to finance intemational trade, which ar ess reetive of
onset activity and more reflective of swings in international trade that were butted by chhanges in trade bartiers such asthe Smoot-Hlawley Tariff A big advantage in using a ratios that, in principle, it largely eiminates the nee to sale fr the level of business activity Another sxivantage is that it wnerlly avoid the need to deflate nominal level, which entails choosing» ce index from the very Himited set of available pre- WWM price indexes However the overall prwieerprige index is used to deflate Bs and commercial paper to see how each component
behaved and to test For any impact of financial iietions onthe real level of BA use A dectine in real commercial paper and risen eal Bas were behind the mp in HAC during the eaety
1030s (Figure 2) ‘This is consistent wth fll inthe availability of non-collatralized Finance (es, commercial paper) and a surge toward collateralized Finance either fom former paper
issuers or traonal bank loan borrowers who lost access to unsecured bak loans
‘Monthy Federal Reserve data on BAs and commercial paper are available between December 1924 and December 1941, In 1940-11, sere ws a large jump in commercial pape “which plausibiy reflecied a suge in US production of defense goods purchased hy the US and UK during 1940 and 1941, Because many firms with defense contuets could be viewed as having both safe revenue sources and even iplicit government-backing on thir deb obligations
Trang 12December 1938 10 prevent the sample rom being contaminated withthe omitted variable bias associated with the ramping up of defense spending inthe early 1940s,
Default and Ligiudiy Rsk
‘Default and liquidity sk combined are tracked by spreads here yields on investment ride corporat and longer U S goverment bonds based on the view that yield spreads between risky and data ree bonds generally reflect cyclical swings i def riek and dale risk premiums (aff, 1975) One such spread is that between yields on A-rated corporate
bonds (Moods) and long term U.S government bonds, denoted as 47K (source: Federal
Reserve (5M), also available fom NBER's Maceohistory Database) ATR was sed instead of the spread between Baa-tated corporate and Treasury bonds (BLLATE, whic, unlike and the BA variables, doesnot have a uit root ona quartelyfrequeney (upper panel, Table S) and exhibits only marginal evidence ofa unit rao ona monthly basis (upper panel, Table 1)
Also usd isthe spread between average inesment ara compote bond yields and longster U S government honds (OTR) Under more “normal” market condition, there is 8 preference inthe empirical literature to lok a spreads between yields on dierent ratings classes of bonds, a ssh spreads may arguably capture swings i the overall default isk
However, thre wore many downgrides of corporate honds during the Depression in response to the worsening economy (Wigmore, 1985), This factor suguests that a quality sprcad based om
ve average corporate bond yield miuht beter track changes in deft sk than a spread based ca parcularratings clas of bonds, Indeed, th gread between on average investment grade corporate and longterm Treasury bonds (OTR) somewhat eutpetons the spread between Sields on A-rated corporate an long-term US government bonds (47%) Although they tend to ‘ove closely together, (he quality spread based on average corpora yields moved up alte less
Trang 13Figure 3: Bond Quality Spreads and Currency-Deposit Ratios
Because ATR and COTR are spreads of corporate yields over long-term Treasury yields, they arguably track both default risk and liquidity tsk in contrat to spreads between yields on low-rated and high-rated investment wrade bonds ATR can be decomposed into the spread
between Aaa- and A-rated corporate bonds, plus the spread between Aaa-rated corporate and long-term Treasury bonds The Aaa-Treasuty spread likely includes a premium refleting both the extra liquidity of Treasury bonds and less prepayment risk—the latter because the Treasury has never prepaid and then refinanced outstanding bonds (Duca, 1999), Hence, in principle, the two spreads (Aaa-A and Aaa-Treasury) could be used instead of a single spread (A-Treasury),
Trang 14‘are used, which raises problems arising from Jenson’s inequality associated with decomposing, spreads like 47 and COT into Tog subcomponents, Fourth, there is a high deuree of
correlation between the Asa-Treasury and A-Aaa spreads during ths ea, raising problems of
‘nulti-collinearity-—particularly using cointegration techriques on & sample spanaing, 18 years Likely reflecting these considerations, oer results (not shown inthe tables) which used
components like the logs ofthe Asa-Treasury and A-Treasury spreads, gave unusual results For thre reasons, the analysis uses bond quality spreads rather than interest rate spreads between BAS and commercial paper Firs, the latter may introduce simultaneity bies Second, switch othe BA-commercal paper rate spread dd not materially fect the hey results “Third, imerpreting bond spreads easier since the BA-comsmercil paper rate spread may aso ‘eft elatve money market conditions from factors oer than dealt o guy isk Currency-To-Depost Ratios
As siguested by mac ofthe monetaristitesture es, Friedman and Sehwart, 1963), ratios of currency hel ouside ofthe hankng system to bank depois canbe use as indicators «ofthe isk of bank deposit ns or the public's lack of confidence inthe banking system Two sac ratios are considered, both constructed with Friedman and Schwartz data that ae available from the NBER, One is the ratio of euency to demand deposits (CIIRAT) andthe other isthe
ratio of currency’ to demand plus time deposits (CZDI47), Both are plosted in Figure
Other Financia Criss or Regulatory Variables
(Changes in bank regulation plausibly affected the we of Bs Tivo monthly dummies are used to conto forthe impact ofthe Banking Act of 1935 RANKACT339 equals eto belore September 1935 (and one thereafter), when the Basking Aet oily took effet, The othe, BANKACTSS1, equals one since Janay 1935, when money market participants may have acted
Trang 15‘This was parintarly ue with a quartety dummy, B4NKAC'TS5, which equated | from 1035:Q3 on, ‘To conserve space these rns are na shown inthe table, Nevertheless, there are some outsized swings in BACP and the rea eve of BAs jus before an jus afer he Banking
Act was enacted As check to sce whether hese short-run effects tered the shot: and long- coeticionsin quarterly vctor-eror correction models, a shortsn dummy RACTDD) was included in soove models, which equaled In 1935-93, nauntive Tin 1935.94, and O otherwise
In ation, some egresions sso inchaded (+! vale to account fr any temparty, coutsize, impact of he banking crisis of March 1933 The monthly version ofthis variable, BANKHOLID, equals one in Mare 1933, when fears of a banking collapse srippa the US, inducing President Roosevelt to order bank holiday Daring that shutdown, regulators examined the books of banks and reopened only the ones dened solvent ones that mon Reflecting that the holiday oecurted late Match sd that the public's confidence in hanks was sil shaken in April the monthly version of BAKO also equals one i Api 1933 and the quarety version ofthis variable equals In 1933:g2 and 0 otherwise) The large jump in relative
BA use without a large jump in default risk spreads during these months stronely suswests that extreme fers of bank rans at chat time induced a Might to collateralized finance 1V, Empirical Findings ‘This section presents eon
tion tests to assess the relationship bebwcen the relative use ‘of BAS an he two measures of risk on a monthly basis "Thes,shortnun findings from vector
erorcorrection models ae reviewed Quartry results are provided asa robustness check Finally the absfate level of tel Bs are analyzed ta Se if Bindings regarding the elative use oF BAS (e., BAC?) ate not mecly an atic of comparing BA use with commercial paper 41 Monithy Cointegration Results
Cointepration analysis shoud he used to detet torn tlationships anion
Trang 16nd quately BA use (denoted wit an L before ACP) have unit oats (lloing Fr possible {ime tends) as do the deal sk spreads LCOTH and ATR, cointegration tests are used to test for ona-rn relationships among the relative use of BAS and one default isk spend (LA or
COIR) Bach ofthese variables has a unit roo, being nonstationary in fevels and stationary in fis ierences, according to augmented-Dickey-Fallr sais that are insignificant forthe levels and significant forthe fest differences ofeach variable (upper panel Table 1) Somewhat
stronger results were fund using LCOTH, whose results are presente first in Table 1
“Tests found only one cointeurating vestr for LEACH and LOTR for samples including and excluding observations after the Banking Act of [935 (vectors and 8) based on vn
standard cointegration tes statistics (Table 1) One's the trace statistic, which rejected only the
absence of one evinteuraing vector in each case atthe S pervent level using Johansen-luseius's (1980) rank significance eviterion The other statistic is the maximus eigenvalue statisti, which
also only rejected the absence of one cointegrating vector in each case a the S percent level In cach case, yetors minimizing the Akaike information statisti favored a lag length of | month, ‘Combined withthe insignificant statistics for the existence of mare thant cointegrating vector
(not shown), these findinas suppor the hypothesis that one long-ron (conte
lationship exists among each group of variables, For the unique estimated vectors I and 2, the quality spread is highly significant withthe hypothesized sign, since pp
thecosfiden signs inthe coinegrating vector (ew, LBACP, = 1 798746 | 3 705096*LCOIR, from vest 1) implies that eulbvium use of BA's relative to commercial paper is inereasng inthe spread between yields con investment grade corporate and Tong-tesm Treaty vel Similar results that suppor the Financial fictions hypothesis were obtained in vector eror-comtection models (VECMS which jointly estimate long: and shorttem eatonships) that included BANKHOLIDAY’ asa short-run ‘vatable (vectors 2 and 8, Table 1) Also encouraging is that etal log levels of B4CP are
Trang 17Figure 4: Tracks and Slightly Leads Actual Use During the Depression Era
gull imped by Vector 2 (Table), ‘Average Corporate TR Sproed
Although nether curency-to-deposit ratio has unit rot, vectors 3 and 4 aed one uch rato to vectors | and 2 for robustness Evidence of cointegration is weaker, since ony the trace statistics and ot the maxEignenstatsties were significant and because the existence of mtiple ‘vectors could not be ejected Further, even if one significant vector were assumed (vectors §
and 6), the curreney-to-deposit ratio was insignificant, while the eoetTicients and significance of
COT were unaffected Thus, tere appears wo belt ole forthe currency to-<deposit ratios As another robusness check, «dummy forthe Banking Act of 1935 was added to vectors 1 and 2 in vectors Sand 6 Inthe absence ofthe Bank Holiday dummy, a nique coimesating ‘vector (vector 5) was found in which the significance and magnitude ofthe bond spread variable
‘were basically unaffected, whereas the Banking Act dummy was insignificant Inthe presence ofthe hank holiday dummy, evidence of cointegration was weaker, Even assuming that a unique ‘vectors found (vector 6), the banking st variable emained insignificant while the significance
Trang 18
eacluding te 1935.39 Ibpedadyidlđed neelt (vetr37 and 8) that were similar to thse af ‘vectors 1 and 2, he financial fietions hypothesis isnot oversees by controling for the eects of the Banking Act of 1935, which appear tobe minor and laraely insignificant
[Al ofthe above pastors of results are also abained when the average corporte-
Treasury spread (COTR) was replaced by the A-Treasory hond yield spread (A7R), as ean be seen by comparing modes in Table 2 with corresponding mets in Table 1
42 Monthly Veto
Error Correction Rests
‘Mogel of changes vsibles whose levels have unit root and ae cintegrated, should ‘not omit information about long-run reatonships to avoid misspecification (Engle and Grange
1987), In sdition to seeing how controling fo shorten efests may alter estimates of long-ron relationships (see Tables 1 and 2, estimating those vetoreror correction models (VECM'S) ‘whic jointly estimate long-run and short-run elationships, is help in seeing wheter the long- an celationships help explain shor-san movements In estimating short-run movements (ist itferencesoflogclevels), the VECM’s regres the First ference i each longer variable oa
lagued frst differences of each long-run factor and include a lagged eror-corection (EC) tem
cult ata minus the estimated equilibrium values of the long-run variable modeled Table 3 presents the sorta models ofthe veltive use of BAs, withthe erv-corection lems based on the corespondingly numbered soinesrating vectors in Tale I hat use the spreads bese the average investment grade corporate bond and fong-tem U.S, government bond yield ‘Thus, the even umbered models each include te hank holiday dummy, while ther models der inthe constation oftheir eror-corestion term and whether they incude an estat ag ist itference term fom adding any aditional long-run variable to the cinteratng veto:
Several intresting pattems aise, Fis, the error-eorretion rm is hiahly ssntican
Trang 19negative ceticien's imply thatthe change in acts! use will decline if atl use exeeeded its estimated euiibsium level in the prior period Since the bond spread variables significant with the amicipated sign in the long-run relationships, the short-nn potions ofthe VECM's also support the financial frictions view that high default risk wil induce a greater relative use of collateralized finance, Second the sizes ofthe EC coefficients ae reasonable, implying that 3:0 4 percent of dsequbria ase cliinated om average each month or roughly 30-10 perent per year, A thied pattern is that dhe hank holiday variable is highly significant, implying some ational light to collateral effet beyond that captured hy the bond risk spree, either
inopliciy either through the eroronretion othe short-run ALCOTR term Foust, consistent ‘withthe comparisons of wectons Ian 2 with vectors Tan 8 in Table | (and 2), models 1 and 2 have similar oeticcnts when the sample excludes the 1935-39 subperid, asin models 7 and 8 ‘which ate placed next 0 models | and 2 in Table 3 This implies that evidence i suppot ofthe
financial ietons hyposhesis is unaested by the Banking Act of 1938 Fifth, although the banking at variable is statistically insignificant in the long-run relationships fn vectors 5 and 6 in Table 1 its rst dtference is significant in models Sand 6, suggesting thatthe Banking Act ‘of 1935 might have had some short-run effects onthe pattems of Finance Sith, only models
2, 7,and 8, al of which focus solely ona longe-sun relationship between relative BA use
(LBACE an he corporste-Treasury vidd sprcad (C119, ha resins that wore well ‘have in contrast to oer models that tried! to include other (ttsicallyisigificont) longs term factors Finally, any evidence fr short-run effects captured inthe cutrency-to-eposit aio ‘is obtained in model 5, but disappears in the presence of the bank holiday variable ede! 6)
Asa robustness check, similar short-run moves from VECMS tat replace the average corporate bond Treasty yield spread (LCOTR) withthe corporate A-Treasuny (LATE were estimated Comparing modes in Table with corresponding ones in Table 3 indicates thatthe
Trang 20the averse corpoate-Treastry yield spread have slightly beter fis and move statistically Significant error-corretion tems than models using the corporate A-Treasry spread 4.3 Beogencity
‘Anata question is whether the bond yield spreads may he driven by the compsiton of the demand for business Finance, which would greatly complicate the interpretation ofthe above findings, In vector-eror conection systems modeling monthly relative BA use quarecly relative BA vse (analyzed in seston 44), and quarterly real use oF BA's, the err correction terms are highly sigificant in modeling BA use but ae highly insignificant in modeling the comporte-Trensury bond yield spreads, indicating that these yield spreads are weakly exogenous
{OBA use, These results point to an asymmetry to how the vector components adjust to
isequiibi, with BA use making the Significant adjustments Thas, consistent with theory, the guilibdam compostion of short-term, esteral business eis drives by the combination af etalt and lguidity isk measured i the spreads of corporate over Treasury ond yields 44 Quarterly Models of Relative BA Use
Because monthly data are noisy and might abscure long-run patterns, the approach was
repeated using quarterly averages of monthly data, Table Sand 6 summarize findings that correspond to the monthly results in Tables 1, with three differences First, Tables § and 6
omit esl that included a Longa damn forthe Banking Act of 1935 (1 fom 1935 g3 1030.0), which wer similar to monthly results but were exch to conserve space
[Nevertheless some madels were tests to cant for any short-run eects by including a short ‘un dammy, BACTDD, which equals {in 1935ig3 and -1 in 1935iq4 Second, because the unsber of degrees of eeedon is wraty smaller, sample excluding 193-1939 was not resented ong oa very short-sample Third, a quately du variable forthe stock market rash of 1929 (STCRASHDD, equals 1 in 1929.44, -1 in 1930 aH, and O otherwise) was included
Trang 21short-tam boosto he uc oŸ BA's rdlaiYe to contneial papetìn 1929:g† is ungound completeiy in the First quarter of 1930, Likely reflecting an unwinding thats aster than the norms! ero comecton process, this variable outperformed a dummy that equaled 1 in 192994 and, «athens in earessions not shown In monthly models not reported, a monthly dummy forthe (October 1929 crash was very insignificant, in contrast othe significa quarry coefficient found in every model, "This iference may reflect thatthe nosines of vontly data sight scuresomte shortun effects, sfc, vetly lhe patton seen in he monthly nests were obtained inthe quarterly models The notable exception s that the inclusion of controls forthe short-run effets ofthe bank holiday, the October 1929 stock market crash and the Banking Act
(of 1935 more substantially improves the fit ofthe short-run models Nevertheless,
comesponding monthly nd quacely models that omit such short variables had similar fis “The non stationarity of corporate spreads use over the sarmple may concern some senders ‘who are uncomfortable with the notion of ni arin corporate spreads (aot that he currency «epasit ratios clearly had long-lasting changes in thei levels) "Tall this conser, one-stage versions of models 1-3 and 5-7 were nun replacing errr-correction terms (dated t-1) from
ration tests with thet lag levels of elative BA use and corporate spreads, Two quarterly lags ofthe First ference of relative BA use and one quately lag ofthe st difference in corporate spreads are inchaded to contol rote shortrun dynamic effects Ae shown in Append Tale At, the qualitative results ae Similar: In these model, the igificant negative
coefficients on the lag low-level of BA use imply dat the wap between the implied long
equilbvium and actual BA use is eliminated at quarterly speeds of adjustment of 11-16 percent 45 Quarterly Models of Real BA Use
‘To see whether these basic results are robust to using absolute rather than relative levels
Trang 22
.Maeiohistory Database) Second, electing the need for some control forthe impact of overall conan atvity on the demand fr finance, the NBER index of business setivity (HUSACT) is included in addition ro the ong-nun variables use earlier As indicated inthe upper-panel of
Table 7, the log levels ofboth variables (denoted with L's atthe stato level variable names) have unit roots according to augmented Dickey-Faller statistics Cointgration tests were frst
conducted on vectors numbers 1 and Sin Table 7) that inelided just ALE, one spread ‘stable COIR or LAR), and LBUSACT, Thìn also tested wore oer vectors (numbers 2 and 6, Table 7 tha ed the bank holiday variable, as well as vectors (numbers Sand 7) that adied all hrc short rn variables, AANKHOLIDAY, BACEDD, and STCRASH These are sila o variables usin aalyaing quately, relative BA use (HAC?) except thatthe October
1028 stock crash dummy equals ia 1929-4 and O otherwise This impli assumes less oF an vnsinding len 1930 g1 than inthe stock crash dummy ithe BACP models, which also equaled evinus 1 in 1930:q1 Consistent wit the diferences inthe constsction ofthese stock «rash variables was a sharp plunge of commercial paper in 192094 followed bya sharp recavery n 1930 g1, hích would affect JBACP more than LBALEV, Finally, corresponding 0 vectors 3 and 7 which include al thee short-run Financial variables, vectors 7 and 8 also inchue helo of the cursency-todemsand deposit ratio, LCDRATIO, which ha a8 statics close to exhibiting anit oot than the curreney-to-total deposits aia (LCZDRATIO), (in ober models
presented 9 conserve space—a long-run dummy For the Banking Act of 1935 was insignificant)
Unique cointgrating relationships were found in each cas, with ly lengths of 4 forall butthe two VECMs (vectors | and 5) that exchided RANKMOLIDAY, RACED, and SICRASH, im which ease S las were need fo Find # unique vector Several pater emerge fiom these ‘vectors in Table 7 and the shortnn models in Table 8 Fis, the quality spread and business
setivity variables are statistalysiaican, wit the hypothesized signs, reflecting tha BA use
Trang 23rao is gaisdealy sigifican, vì aien ndicadng thất high curency-to-deposit ratios ace associated with lower BA use, ceteris paribus This result suggests that thế nggnveeies oŸ investor concerns about the value of bank guarantees on BA that may have been reflected inthe cureney-depasit ratio likely outweighed the postive effects of increased incentives fr banks to issue BAS than make traditional loans, ‘Third, the inclusion of the eurreney-deposit ratio
increases the magnitude ofthe coefficient on the quality spread, while reducing that ofthe
business activity index Nevertheles, the qualitative results regarding the effects of
liquidity/defaul risk and business activity on BA use are unaffected by the presence of currency: deposit ratios Also noteworthy is how the inclusion ofthe short-run banking/financal variables
very noticeably improves theft ofthe corresponding models, implying thatthe banking act of 1935 had temporary depressing effects on the real level of BA use, while the stock market erash and bank holiday episodes induced more use of BA financing, consistent with a Might to
collateral during flights to quality inthe corporate debt markets Nevertheless, in the presence of Figure 5: Estimated Equilbrium Real BA Levels Tracks and
Slightly Leads Actual Levels During the Depression Era,
autre inl by "esters (abo 7),
‘Actual Real Domestic
Trang 24these short-run event contos, the implied long-run equilibrium relationship from quality spreads and the busines atvity index track an shy lead actual log levels of real Bs well (Figure
5), Overall, the findings forthe level of real BA use are consistent with those for the use of BAS relative to commercial paper
Y Bond Yield Spreads and Business Credit Composition
ring the Current Crisis 5.1 An Empirical Specifieation ofthe Paper-Bank Loan Mix
Since the late 1930s, Bas hive become much les important reflestng the depening oF edit markets andthe Fed's shift to condcting open market operations in Treasuries “This
sakes the 10 of BAs commercial pape lest informative, Also, the deepen The
commercial paper sakes from the ise of asset-backed paper implies ha he lnks between commervial peper an veal activity are more complicated then during the 1930s Accordingly instead of BACP or te real levels of BAs a commercial paper, we model commercial paper as a share of commercial paper plas business loans (CP BEAM, se Kashyap, Wileos, and Sei,
1997), CPBLAMINs total commercial paper oustanding (consistently defined since 2001) as a shar of commercial paper and commercial and industrial loans tll commercial banks It itters fom the mix variable of Kashyap, etal (1997) in neludig ll commercial paper, rather than ost paper issued by nonfinancial corporations, The reason forthe diference isthe
increasing we duns
he carly pat ofthe decade of erat at many nonfnancial companies who Yorowel financial entities who funded the coi by issuing asset-backed paper Paper ised inclly by nonfinancial fins declined i relative terms during much ofthe decade, as did bank loans, beth of which lost marketshare to asse-backe paper funded exe
“To make the analysis moe comparable with that forthe Gret Depression, CPREMENS
Trang 25(B4A101R).` Rises inthis spread reflect that investors demand higher premiums for corporate default and liquidity risk Such rises are less ofa threat othe funding of bank loans, as banks hhad greater access to insured deposits and the Fed's liquidity facilities, particularly before mid October 2008, As.a result, the price and non-prie terms of commercial paper would likely rise relative to those of bank loans, implying a negative relationship between the commercial paper
share of short-term business credit (CPBLX) and the corporate yield spread (Figure 6a and 6b), Interestingly, spreads between Baa and Aas-rated corporate bond yields rose almost as high in late 2008 as during the worst of the Great Depression (Figure 7), Being the largest component of the Baa-10-year Treasury yield spread, this spread suguests that default and liquidity risk between corporate and Treasury bonds likely rose to levels not een since late 1933,
Trang 26igure: Changes in the Relative Use of Commercial Paper Usually “pons Vary Inversely with Changes inthe Corporate Bond Vield Spread ins
Trang 27
“The 3-month TED (LIBOR- T-bill rate) spread is included in case the conditions in the LIBOR market appreciably affected the bank lending component ofthe mix variable, However, because commercial paper issuers usually have back-up lines of credit at banks, the impact of LLIBOR swings on the mis variables likely more limited than that of swings in risk premia on corporate bonds * Nevertheless there may be some marginal information in swings in the TED spread given thatthe bond and TED spreads do not move completely in unison (Figures 8 and 9) ‘To model the impact of Federal Reserve and Treasury actions and announcements in October 2008, interactive variables are tested These variables multiply the corporate bond yield spread (BAA10TR) and a dummy (FP) equal to between October 2008 and July 2009, and 0 otherwise ‘The dummy is designed to proxy forthe combined effets of three Federal Reserve and Treasury initiatives, ‘The ist was the Treasurys extension of deposit insurance to many money matket
Figure 8: Commerical Paper Spreads Narrow Following Announced Fed Actions Affecting Money Funds and Commercial Paper ‘TAF Salis os Fnac Comme Pape
W107 SPT Novo? Jes Me My JON Sop NHAN JmĐ Me
“Forte inpacof Fed acions othe LIBOR mathe see Armani, tl 2008), Wilms al sor 2009) and [Wu 2608), For infomation wewvneelouMilsgfnddetvPonps Lenfing pl and we falters goto on Fed ert programs see wi test so AetSetelsseiehoe HỆ le sm,
Trang 28
Figure 9: Interbank Loan Coss RetreatAfter Rescue Efforts hà ss < .¬ * anor ors manh)
"mm Mr Mayo JON Sepa
‘mutual funds The second was the Fed's decision to reat a new Funding facility that would lend to depositor institutions in order for them to purchase ABCP from money Funds
experiencing significant redemption pressures, This was done to help prevent flood of monsy fund redemptions fom sting of a disorderly sle of commercial paper into an unscted ‘market Because this action was unlikely to fully alleviate increased uncertainty that firms ‘night be unable to issue new paper to repay maturing debt investors became to risk averse the Fe also announced it would und purchases of top-rated commercial pape via anew facility thatis supported by the Treasury-the commercial paper funding Faity (CPEP)
‘Under this backstop facility, unsecured three-month A1/PI-rated paper is purchased ata rate equal the three-month O1S rate plus 100 bass points, and ifthe issuer does not provide sufficient collateral, plus another 100 basis points Unsecured asset-backed, AI/PI-rated paper is purchased ata rate equal tothe three-month OIS rat plus 300 basis points Owing to the penalty discount pricing, the build-up of paper purchased in a crisis hrough the CPEF will
Trang 29factty erated during a petod of heightened tress has less marginal effect when criss conditions in the paper market return toward normal, To capture tis feng, the 0-1 vadble (EP equals 1 inthe months (October 2008 and July 2009) when the Fed held atleast 10 percent of total U.S -issved commercial paper: tn principle, the dummy variable, FY which equals 1
from October 2008 to Jy 2009, may also capture other roughly contemporaneous government interventions, sich asthe FDIC's Temporary Liquidity Guacente Program, TARP leuiaton, and capital injections, However the fing of rave une ofthe CPEF to holding less than 10 percent of outstanding commercial paper in August 209 is not coatemporaneaus withthe
ins, Furthermore, the iteraction varale loses significance i the
ering of those ps
‘snvinding backstop feature ofthe CPEE isnot taken ito account by simply defining P10 equal ce in all months since October 2008, which would beter align with the ongoing aspects of ose other Facilites, Nevertheless, its dliicul to completely disentangle the effees ofthese caher faelides
Reflecting the cushioning effet of sich actions on he impact of higher default and
liquidity isk pressures the interactive term FP *P107R is hypothesized to have an opposite
sign from a non-interactive yield spread ‘Those hypothesized signs implicitly assume that the net effect of Fed and Treas tions to bolster money market conditions andthe banking syste hd largo short-run cushioning effets on commercial paper marke than on bank loans, whieh, pio isan empl issue
Under another liquidity program, the Tenn Asset-Backed Securities Loan Facility (TALE) which was started ater Tong delay in Maret 2009 (announced in December 2008), the Fed putchasestpir rated asset-backed mesum-term debt sat funds seveel types of loans, included business loans backed by the Sl! Business Adminisuation, equipment oan, sxest ears, student loans, and ato loans In this program, issuers voluntarily approach the Felt For
Trang 30“TALF in March 2009 was secompanie by a revival of commercial paper issuance tht Iter sAbedjn Apil teed, in all the models March 2009 was large, positive cuir that largely ound in April Paper issuers and investors may’ have hal missplaced hopes that she TALE ‘would felp improve liquidity conditions in the commercial paper market fortwo FeasOns Fist reports indicated that matkets were apparently disappointed by the low inital volumes of TALE purchases, Second, and perbps sore inaportatly, the TALE was designed aainly to improve
liquidity conditions in medium-term asset-backed securities used to Fund consumer ond business
loaas over the medi, not the very short-run The hqpidiy problems avising during the ‘nancial crisis has Gostered some segmentation of securities markets and was a major atonale for asset market interventions by the Fed and Treasury) that plausibly imi spill-over eects of the TALF on the commercial paper market, Some models include, JT41F; equal to | in March
2009, -1 in April, and 0 otherwise Comparing models 3 wih 4 and models 7 ith 8, including
STALE cleans up residuals without altering key coefficient estinates other than the TED spread To handle unosua event sks that boosted liquidity sk, a dummy viable ng/¥, = 1 in 2007.08, =0 otherwise is included for she market reaction to the August 9, 2007 decision by some European hee Funds to halt redenpions,obsing othe lack of market trades om many of|
thie subprime mortgage-related assets, This induced a surge in LIBOR-OIS and LIBOR-
‘Treasury spend that was not iumediatly picked up by «sure in corporate bond yield spreads cor the tl lag of the TED spread On similar grounds, «dummy for the September 2008 failure cf Lehman (Leaman ~ 1 in 2008.09, 0 otherwise) is aso included Finally eecting that commercial paper issuance (and hence CPBEMEN) is more dependent onthe nee so finance inventres (see Kashyap, Wileos, and Stein, 1993) regressions also included the log ofthe
‘onthly ISM purchasing managers’ (oanafactring) index oF inventory demand, which wacks te change in inventories and is more simely than inventry-shipent ato data ad much less
Trang 31
ISM index (A3LINT/, where the three-month change reflects the tendency for commercial popes to have a 3-month maturity Note thatthe timing of the ISM survey is early in a moat, and tends to reflect activity in month tl (2 tendency noted by Hanis, 1991) For this reason Simultneity isnot much of an issue since using the met dated index essentially selects activity in period 1-1 Furthermore, the indes is used asa sealing variable to control for he influence of inventory swings on the mix variable
Inthe shor sample over which commercial paper data are consistently defined (2001.01- 2009-09), the paper-mix and bond yield spread vasibles ae (2), reflecting that a the end ofthe sample, the paper mix plunges while the bond yi spreads soar, leading to serial comtelation in both ievels an frst differences atthe sample's end To limit distortions from such trends, the models regress fest difesences ofthe paper-oan mix on fi 1 differences a yield spreads for sont 1 through nthe presence of contol variables (g/'4,Lefman, and LIN’ ASLINY) 5.2 Empirical Results From Modeling the Paper-ank Loan Mix Daring the Crisis
“able 9 presents rests rom eight euressions that reflect diferent sample period and firs iterence rate spread vavibles (draped), Moslels (18) use the lewtines ISM inventory inde, while models (3}(8) insted use the 3-manth change inthe fog ofthe inde, bur athenwise correspond to molels(1}{4) with respect to sample periods and variables Mdel 1 covers he
sample through October 2008 and omits any controls for Federal Reserve and Treasury
programs, As hypothesized, the tl and 13 lags of ABAA7R are negative and significant (the «2 Jags insignificant, 38 ate the financial evisis dammnies (lug/4 and Lefman) However, when the sample is extended fo end in September 2009, the time tI lag ABAATEis no longer
significant and even has a positive sign, Results ae similar in models (3) and (6) using a slightly
Trang 32«iereat conteo For inventory activity "This shift in eoelfielent suagesls that the new eredit programs may have affected the impact of fiquidity and default risk premiums onthe relative use ‘of commercial paper and bank foans,
To shed more light on that hypothesis, models 3,4 7, and 8 are estimated over the fll sample and include @ 0-1 variable (FP) for the liquidity proeramts maltiplod by he first Aiference ofthe bond yield spread, ‘The inclusion ofthese terms yields non-interactive rate spread coefficients dat are similar to those in samples ending in October
2008, and interactive rate spreads (FP* PALA) that are joy significant In particular, the interactive rate spread coeiciens at ags and 3 are hiaily statistically significant and oppositely signe from the non-interactive rate spreads, consistent with lguidty programs having a desired effec, One caveat is that March 2009 isa big enoush positive cutie, hat there is evidence of serial comolaton inthe residuals forall the ul sample models (2,3, 6, and 7) that ons the PALE
program variable This problem appears corrected by the presence ofthe ATALE variable inthe interctve-spread models (4 and 8), The overal puters of results gest that the Federal
Reser nd Treasuty liquidity pr sams have helped stabilize the relative use of commercial
paperby counteracting the influence of wider lguiity and default risk premiums Nevertheless (his interpretation and the findings as a whole should be viewed with caution in lght ofthe short spl, which makes it infeasible to estimate erorcorrection models using levels of spreads with coimtgstiontehniques that may more fully reflect the short and longi inucnses of securities market conditions on credit ows
During the early 1990s, the Federal Reserve didnot aetvely intervene in commercial peper purchases when commercial paper plunge in tandem with rising corporate liquidity and
Aticut wo dent) an effect of inventors However inthe longer sample the invenory vanable manly has a
Trang 33deft isk premiums, even afterit was pranted discretion todo so inthe summer of 1932 in an amendment (section 13
3)) ofthe Federal Reserve Act, In contast1o that episode, the Federal Reserve hs intervened to provide liquidity i the commercial paper market ding the current crisis, especially since October 2008, Although the samples ae too short tobe definitive, the evidence shu far supports the working hyposhesis that these ations have helped stabilize the wse
of commercial paper by countering rising liquidity premiums on corporate debt, Vi Condlusion ‘This study analyzes the relaive use ofa collateralized and easily funded source of external business finance during the Great Depression and relates those results te money market
conditions dosing the event financial erss, Because the forms oF inance examined (bankers acceptances and commercial paper) are short lived the timing af their movements should have been more else elated to contemporaneous changes in default isk spreads than were bankifirm faiures or movements in the stock of bank loans, which le she economy more nd
have boen used in prior studies ofthe Great Depression, The analysis uses spreads on yields
between on A-ated corporate and U.S Teeasory bonds, aswell as those between averas ‘nvestentsrade corporat bonds to tack ex ante default and liquidity risk premiums Also assessed were curreney-o-depost ratios, which could have sen with banks, which would tend to boost BA use or which cul ave increased with investor dbs aout the value of banks’ hacking of BAS, which would lower BA use Evidence of net impact of bank rn is, as proved by urreney-to-deposit ratios, is weak or mixed with anegative effect on balance perhaps rellecting thatthe ratios may tack countervailing fests
Consistent with Bernanke (1983) and dhe pre-World War Il studies of Kimmel (1939) and ‘Young (1952), evidence indicates thatthe provision of eet shifted toward collateralized debt
Trang 34\defult and possibly liquidity isk dang the Great Depression In particular, the real level of bankers acceptances and their use relative to non-collateralized commercial paper were strongly and positively related so ond quality yield spreads Furthermore, these shifts in the composition
‘of extemal finance were fag and persistent, supporting the view that financial fictions and reduced credit availability played an important role in depressing the US economy in the 1930s
Also significant were short-run events, such asthe October 1929 stock market erash and the
1033 bank holiday that spared Rights to gurls nthe bond met and a ight tocuality (BAs) im the money markt an perhaps fom the loan market Overall the Findings fom the Great Depression era are consistent with the implications of research on financial frictions and fights to quality (€., Bernanke and Blinder, 1988; Bernanke and Geller, 1989, Bernanke, Geller, and
Gilchrist, 1996, Jaffee and Russell, 1976, Kashyap, Wileox, and Stein (1993), Keeton, 1979, Lang and Nakamura, 1995; und Stiglitz and Weiss, 1981)
‘Those findings are analouous to snalyZing the composition of short-term business credit
dying the current Financtal essis, In particular, up until the Federal Reserve end Treasuey actions of October 2008, when corporate
reasury bond vield spreads rose, the use of security: ‘markets funded commercial paper fll relative to bank business loans, which could be funded with insured deposits ‘This linkage broke down after the Fed and Treasury's announcements to purchase commercial paper, provide discount loans to money market funds, and insure money
snarket fund accounts The pre-Oetober 2008 pattern and the ensuing break fom it sugsst that he 2008 pullback in commercial paper outstanding owed to spikes in iqudity premiums This interpretation is plausible because higher liquidity premiums onthe commercial pape are more amenable to heing alesse hy the postSeptember 2008 ations oF the Fed and the Treasry (hen are most of solveney questions about commercial paper issuers, Thas fa, these ations
Trang 35‘Such an interpretation i tentative and preliminary mainly because ofthe short sample vale for analyzing consistent messures of commercial paper and becanse the financial crisis isnot yer over Neverteles, earlier evidence fram the Great Depression era indicates that security-funded sources of extemal inane, such as commercial paper re highly vulnerable the jump in liquidity ssk premiums tha ypcally characterize financial erses Indeed, real commercial paper oustanding Fell 5 percent between July 1930 and May 1933, Furhermors
recent experience suguests that such surges in liquity premiums can be countered by appropriate central bank asset purchases thereby cushioning the supply of securty-funded credit quality borrowers By means of comparison, real commercial pape fell 74 percent
the 28 months between Iuly 1930 and August 1932, but by ales dramas 44 percent in the 25 months between July 2007 and August 2009 OF course, some ofthis difference may also
reflect any impact on credit demand and supply ofthe stronger macroeconomie paliey response in the recent episode Nevertheless, the impacts ofa spread variables on the elative use of commercial paper were estimated in the presence of some controls for ere demand in hath
periods, and commercial paper volumes began rising during the sursmer of 2009 In addition,
some of the beneficial effects of the commercial paper funding facility may be hard 10
rom complementary effects of other efforts to bolster liquidity in eredit markets With appropriate caveats, Findings from both the Great Depression andthe recent financial esis
gst that new liquidity programs in the U.S have, thus far, helped prevent the money markets
Trang 36
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Available Upon Request, Not Intended for Publication
Appendix A: How This Paper's Study of the Great Depression Relates to the 2007 Turmoil in Asset-Backed Commercial Paper Markets
Compared to the current ment of corporate finance, Financial markets were mich less developed during he ere examined, Party to offset liquidty isk investors, commercial paper issuers are forced by market forees to obtain Formal back-up ins of bank eet wo ensue timely payavent, a practice which generally began in the 1970s
However, del ssk remains an important aspect facing scutes markets Ostensibly to addres such concerns nto expand the availabilty of commercial pape, the asset-backed
commercial paper (ABCP) market had grown rapidly and by yearend 2006, provided sl
‘move finance than more traditional commercial paper Many ofthe assets backing commercial paper were securities, including now-suspeet subprime morigage instruments As unanticipated increases in problem subprime mortgages mounted, the valve ofthe assets backing this paper became highly suspect in the summer of 2007 Ironically, it was assecbscked commercial paper ‘hat was hardest hit, probahly because the paper had been viewed a safe based othe Financial assets serving as collateral ater than the underlying strength ofthe issuing fim asin the case af traditional aonfinancal commercial paper Nevertheess this even is consistent with this
study's findings from the 1930s, For much ofthe recent crisis, ile paper ineligible forthe CCPEF was issued, ostensibly because investors viewed sich paper as lacking in liquidity oF sufficient collatral backing In contrast, ding the 1950s the liquidity of the BA maker was
suntined bythe Peds conduct of money market operations and BAs were (and sil re backed by more concrete and re-sellable commodities and products In his regard, the evidence
presente i this stady provides insights shout how and why segs in figuiity and detoult isk