Real estate bubbles leading to bank troubles — 2008? Not exactly

Natacha Postel-Vinay finds a strong link between mortgage lending and bank failure in the 1930

The experience of the U.S. Great Depression suggests parallels between 1920s mortgage lending and the recent financial crisis

Bank lending was at the heart of the Global Financial Crisis when it began in 2008, with the collapse of subprime and ‘piggyback’ loans having detrimental effects. Using newly-discovered archival documents and a newly-compiled dataset from 1934, Natacha Postel-Vinay looks at the lessons of the Great Depression. She writes that the prevalence of ‘second mortgages’ (loans which supplemented regular mortgages due to borrowing limits) led to higher rates of foreclosure. This, in combination with a protracted foreclosure process, helped to severely weaken the liquidity of banks in the 1930s, contributing to their failure

Covid bonds are of limited appeal right now, but they may yet be useful to the government

Both the Conservatives and Labour are keen on a ‘Covid bond’, which would encourage savers to fund the post-pandemic recovery. But the economic rationale is not immediately clear. Natacha Postel-Vinay (LSE) looks at how bonds could help the government navigate two possible challenges: rising inflation and tax hikes

What caused Chicago bank failures in the Great Depression? A look at the 1920s

This article reassesses the causes of Chicago state bank failures during the Great Depression by tracking the evolution of their balance sheets in the 1920s. I find that all banks suffered tremendous deposit withdrawals; however banks that failed earlier in the 1930s had invested more in mortgages in the 1920s. The main problem with mortgages was their lack of liquidity, not their quality. Banks heavily engaged in mortgages did not have enough liquid assets to face the withdrawals, and failed. This article thus reasserts the importance of pre-crisis liquidity risk management in preventing bank failures

Sitting ducks: banks, mortgage lending, and the Great Depression in the Chicago area, 1923-1933

What are the main causes of bank failure? This thesis contributes to answering this question by focusing on the city of Chicago during the Great Depression, which experienced one of the country’s highest urban bank failure rates. Focusing on the long-term evolution of state banks’ balance sheets, it finds that what greatly mattered for their survival was the inherent liquidity of their pre-Depression portfolios. Indeed, all banks, including survivors, suffered tremendous deposit withdrawals. Yet those that ended up failing could be identified as weak ex ante. Such weaknesses were linked to the inherent liquidity of their portfolios: the higher their amount of long-term illiquid assets (in particular, mortgages) before the Depression started, the more likely they were to fail ex post. The first paper identifies mortgage holdings as the most important predictor of bank failure, and explains how their intrinsic lack of liquidity came to matter more than their low quality. The second paper zooms in on mortgage contracts themselves, and finds that debt dilution due to the “second mortgage system” led to a lower probability of repayment. Nevertheless, this second paper shows that increased default rates affected banks only insofar as foreclosure was a long drawn-out process that lasted more than eighteen months in Illinois – a great impediment to bank survival in case of a liquidity crisis. The third paper asks whether mortgage securitization would have solved the liquidity issue, and uncovers the extent of actual securitization taking place at the time in Chicago. However unbinding commitments and the lack of a regulated exchange created inefficiencies not unlike those of today. Together these results reassert banks’ responsibility in liquidity risk management. While credit risk continues to be an essential feature of banking, and has been recognized as such, renewed attention needs to be paid to the ways in which banks manage the inherent liquidity of their portfolios

The City of Glasgow Bank failure and the case for liability reform

The City of Glasgow Bank failure in 1878, which led to large numbers of shareholders becoming insolvent, generated great public concern about their plight, and led directly to the 1879 Companies Act, which paved the way for the adoption of limited liability for all shareholders. In this paper, we focus on the question of why the opportunity was not taken to distinguish between the appropriate liability for ‘insiders,’ i.e. those with direct access to information and power over decisions, as contrasted with ‘outsiders.’ We record that such issues were raised and discussed at the time, and we report why proposals for any such graded liability were turned down. We argue that the reasons for rejecting graded liability for insiders were overstated, both then and subsequently. While we believe that the case for such graded liability needs reconsideration, it does remain a complex matter, as discussed in Section 4

Cryptocurrencies: the future of money, speculative bubble or something else?

This month’s episode of the LSE IQ podcast investigates whether cryptocurrencies are the future of money, a speculative bubble that will burst, or something else

Functional diversity and co-operativity between subclonal populations of paediatric glioblastoma and diffuse intrinsic pontine glioma cells

The failure to develop effective therapies for pediatric glioblastoma (pGBM) and diffuse intrinsic pontine glioma (DIPG) is in part due to their intrinsic heterogeneity. We aimed to quantitatively assess the extent to which this was present in these tumors through subclonal genomic analyses and to determine whether distinct tumor subpopulations may interact to promote tumorigenesis by generating subclonal patient-derived models in vitro and in vivo. Analysis of 142 sequenced tumors revealed multiple tumor subclones, spatially and temporally coexisting in a stable manner as observed by multiple sampling strategies. We isolated genotypically and phenotypically distinct subpopulations that we propose cooperate to enhance tumorigenicity and resistance to therapy. Inactivating mutations in the H4K20 histone methyltransferase KMT5B (SUV420H1), present in <1% of cells, abrogate DNA repair and confer increased invasion and migration on neighboring cells, in vitro and in vivo, through chemokine signaling and modulation of integrins. These data indicate that even rare tumor subpopulations may exert profound effects on tumorigenesis as a whole and may represent a new avenue for therapeutic development. Unraveling the mechanisms of subclonal diversity and communication in pGBM and DIPG will be an important step toward overcoming barriers to effective treatments

Book review: citizens, context and choice: how context shapes citizens’ electoral choices

Natacha Postel-Vinay is impressed by the radical and bold conclusions presented in this study of the ways in which institutions can affect our voting behaviour

Book review: bankers, blogs and bailouts

Natacha Postel-Vinay takes a closer look at Fault Lines, a book which remains at the centre of debate and controversy