The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk-Reference-Cited by-同舟云学术

The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk

Published:2024-03-25 Issue:2024-06 Volume: Page:
ISSN:2163-3738
Container-title:Economic Commentary (Federal Reserve Bank of Cleveland)
language:en
Short-container-title:EC (FRB Cleveland)

Author:

Prescott Edward S.¹^ORCID

Affiliation:

1. Federal Reserve Bank of Cleveland

Abstract

This Economic Commentary describes the collapse and subsequent bailout of the Detroit-headquartered Bank of the Commonwealth in 1972. Commonwealth failed because it invested heavily in long-duration, fixed-rate municipal securities in the mid-1960s in a bet that interest rates would decline. Instead, with the beginning of the Great Inflation of 1965–1980, rates rose. Liquidity problems then ensued, and the bank approached failure. Unable to find an acquirer because of Michigan’s banking restrictions, regulators instead bailed out the bank because of fears of contagion. This article also compares the collapse of Commonwealth with the spring 2023 failures of Silicon Valley Bank and First Republic. In particular, I discuss structural changes in banking that impacted the speed of the runs and the pools of potential acquirers.

Publisher

Federal Reserve Bank of Cleveland

Reference23 articles.

1. 1. Bank of the Commonwealth. "Annual Reports, 1965-1970, 1972." Annual Reports at Academic Business Libraries (Purdue University). https://apps.lib.purdue.edu/abldars/index.php.

2. 2. Board of Governors of the Federal Reserve System. 2023. "Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 28, 2023." https://www.federalreserve.gov/publications/2023-April-SVB-Key-Takeaways.htm.

3. 3. Brimmer, Andrew F. 1984. "The Federal Reserve as Lender of Last Resort: The Containment of Systemic Risks." Paper presented before a joint session of the American Economic Association and the Eastern Economic Association, December 29, 1984. Dallas, TX.

4. 4. Congressional Research Service. 2023. "Bank Failures: The FDIC's Systemic Risk Exception." In Focus, no. 12378 (April). https://crsreports.congress.gov/product/pdf/IF/IF12378.

5. 5. Cook, Timothy Q. 1978. "Regulation Q and the Behavior of Savings and Small Time Deposits at Commercial Banks and Thrift Institutions." Economic Review (Federal Reserve Bank of Richmond) 64 (November/December). https://fraser.stlouisfed.org/title/960/item/477291/toc/501617?start_page=12.