Margin practices and requirements during the National Banking Era: An early example of macro-prudential regulation

The New York stock market was plagued by a series of financial crises during the National Banking Era, culminating in the Panic of 1907. The traditional view holds that the crises were rooted in structural flaws related to trade settlement as well as excessive and indiscriminate margin lending that remained unaddressed until the formation of the Federal Reserve Bank. An examination of the historical record, however, shows that brokers sought to control contagion and spillover effects through reform of the settlement process and by modulating margin lending rates and maintenance requirements according to macroeconomic conditions, counterparty credit-worthiness and market volatility. Using newly gathered archival data, we show that the New York Stock Exchange enacted macro-prudential regulations that may have reduced the severity of crises during this period. By providing early evidence of private sector responses to rising systemic risk, the paper addresses an important aspect of early market microstructure.