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Contagion Effects of Three Late Nineteenth Century British Bank Failures

British banking during the period 1860 to 1908 experienced a number of bank failures. For example, between 1880 and 1890 there were 29 bank failures. The failure of a bank not only affects the depositors of that bank but also other banks, their shareholders, the monetary system and general economic stability. The main reason for the latter is the loss in public confidence in the banking system which leads to a withdrawal of funds by depositors. In this paper I consider the contagion effects of the failure of Overend Gurney Co. in 1866, City of Glasgow Bank in 1878 and Baring Brothers in 1890. I look at these bank failures for two reasons. First, these failures have been of large and prominent banks which have been argued to lead to banking crises. Second, the failure of these banks played a large part in shaping British banking. For example, the failure of City of Glasgow Bank led to the Companies Act of 1879 which required all banks to have their accounts audited. Unlike previous studies which have considered bank failures, this study uses capital market data in order to assess the impact of these failures on British banks. This study also examines the relationship between the contagion effect and the specific cause of the bank failure. The paper is arranged in the following manner. Section II provides a brief history of the failed banks and tries to identify the causes of their failure. Section III provides a theoretical background to the various attempts that have been made to model contagion. Section IV describes the sample data while section V explains the methodology used. Section VI presents the results, and finally, section VII concludes the study.