Bank Regulation, Network Topology, and Systemic Risk: Evidence from the Great Depression

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Abstract
We study how bank regulation interacts with network topology to influence systemic stability. Employing unique hand‐collected data on the correspondent network for all U.S. banks prior to the Great Depression and a methodology that captures bank credit risk and network position, we demonstrate how the pyramid‐shaped network topology was inherently fragile and systemically risky. We measure its contribution to banking distress, and show that a bank's network position as well as its network neighbors' risk are strong predictors of bank survivorship. Institutional alternatives, such as branch banking, and alternative topologies deliver networks that are more stable than that of 1929.

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