Working Paper
Chenzi Xu and He Yang. Working Paper. “National Banks and the Local Economy”.Abstract

This paper studies how banks impact the local economy and in particular examines their role in providing monetary services through stable liabilities. We study the United States National Banking Act of 1864 that passed during a period when the circulat- ing money supply primarily consisted of privately issued bank notes. The Act required “national banks” to guarantee bank note liabilities with federal bonds, thereby creating a new and stable currency, reducing transactions costs and facilitating exchange. National banks also faced regulatory capital requirements that varied by town population. Using the jump in the capital requirement as an instrument for national bank entry, we find that the composition of agricultural production shifted from non-traded crops to traded crops while total production was unaffected. Moreover, trade activity proxied by employment in trade-related professions grew. National banks also led to significant manufacturing output growth that was primarily driven by inputs use, and these changes can be attributed to national banks’ role in providing short-term credit and reducing transactions costs in trade. Furthermore, the higher levels of manufacturing output persisted for two decades.

WFA Cubist Systematic Strategies PhD Candidate Award for Outstanding Research 2019

Chenzi Xu. Working Paper. “Reshaping Global Trade: The Immediate and Long-Run Effects of Bank Failures [Job Market Paper]”.Abstract

I provide evidence from the most severe banking crisis in British history that financial shocks can have a long-lasting impact on the patterns of international trade. The setting for my study is the unexpected failure in May 1866 of Overend and Gurney, London's largest interbank lender. Overend's failure led to widespread bank runs in London that caused 12 percent of British multinational banks to fail. These multinational banks played a dominant role in financing international trade during the 19th century. Using detailed archival records, I document that 10 percent exposure to these failed banks led to 5.6 percent fewer exports the following year. Strikingly, the impact on international trade patterns persisted for almost four decades despite a rapid recovery of the banking sector following the crisis. There was limited within-country substitution, leading to permanent divergence in exports levels across countries: those more exposed to bank failures had 1.8 percent lower annual export growth from 1866 to 1914. Countries that faced high export competition and those that had little access to alternative forms of credit experienced more persistent effects.