Clearinghouses as Credit Regulators Before the Fed?

Clearinghouses were private organizations that not only had the power to audit member banks’ balance sheets and levy fines, but also provided emergency liquidity during large-scale financial panics. This paper studies how clearinghouses affected bank composition and solvency during stable periods as well as panics. An annual database of all national bank balance sheets from 1865 to 1914 indicates that national banks grew larger after the creation of a clearinghouse. Relative to the rise in assets, banks reduced their cash reserves and individual deposits and increased their loans, circulation, and interbank deposits. The analysis also shows that while clearinghouse members were less likely to fail during panics, they were more likely to fail in other periods, particularly those in non-financial centers. In this way, clearinghouses seem to have freed up additional resources during stable periods and delayed bank failures until the potential for contagion was removed