Canadian-Bank Stability During The Great Depression: The Role Of Bank-Note Issuance And Finance-Act Advances

During the Great Depression more than 10,000 U.S. banks failed amidst widespread depositor runs while no failures or runs occurred in Canada. This paper credits the Canadian stability to a high degree of diversification, liquidity and shareholder monitoring except during the highly volatile years of 1932 and 1933, when diversification benefits dissipated and bank stability became a function of implicit government support and excess-reserve-management strategies. These strategies gave large banks reserves of gold and contingent shareholder liability as collateral for the issuing of bank notes with which to meet potential bank runs and all banks continued using Canada's lender-of-last-resort facility.