An Illusory Feeling of Stability: Bank Failures in France in the 1920s

This article uses historical data from French banks to document the sources of bank failures in France between 1918 and 1928. The analysis shows that failed banks faced liquidity rather than solvency constraints. Although banks exhibited high capital ratios, such ratios did not ensure stability and encouraged greater exposure to risky and illiquid activities. When losses materialized or repayment requests intensified, banks were forced to default. Conversely, banks’ holdings of readily available liquid assets are associated with a lower probability of failure, highlighting the protective role of liquidity buffers against adverse shocks.