Banking Panics, Bank Failures, and the Lender of Last Resort : The Showa Depression of 1930-1932

By using bank-level data pertaining to the period of the Showa Depression in Japan, we examine whether banking panics caused solvent banks to close down and fail. We find that bank fundamentals were weakly related to the failures during the panics. This result implies that the confusion on the part of depositors regarding bank asset quality was not negligible during the panics. Further, we find that during the panics, the Bank of Japan (BoJ) selectively provided liquidity assistance to solvent banks that suffered heavy withdrawals. The BoJ as a lender of last resort prevented the closures of these solvent banks and mitigated the potential problems of the panics