The strength of a weak institution: Clearing House, Federal Reserve, and the survival of commercial banks in Manhattan, 1840-1980

This paper compares two types of regulatory institutions-the industry cooperation and government regulation-and examines the conditions under which the industry cooperation overcomes the problem of collective action and enacts effective monitoring and enforcement on organizations. We use the history of the New York Clearing House Association, an industry-level cooperative arrangement among commercial banks in Manhattan, to illuminate the collective action problem. We analyze bank failure rates and risk orientation and show that the NYCHA successfully organized private cooperative arrangements that enhanced its member banks' survival chances, and reduced their risky behaviors. We argue the strength of the NYCHA rests on its nature of localism, due to the institutional constraints of bank branching. We also find that the survival benefit of the NYCHA on its member banks diminished after the Federal Reserve was founded, suggesting that the substitution of government regulation on the private industry-level institution can bring about unexpected organizational outcomes.