Financial stability and interdependence: free banking in Antioquia

Abstract

Free banking systems, as archetypes of financial deregulation, are presumed unstable. Antioquia, Colombia, between the 1870s and 1880s challenges this. Despite weak regulation and political turmoil, the region sustained two decades of credit growth, circulating private banknotes, and no bank failures. To explain this resilience, we develop a property-network approach to estimating systemic risk—suited to historical settings where scarce data on credit and asset prices render conventional techniques inapplicable. Reconstructing banks’ ownership ties, we show that interlocking shareholders shaped each institution’s incentives and constraints, at once opening channels for contagion and buffering against collapse. A stress-test simulation indicates this cross-ownership was stabilizing: the system could absorb unusually large shocks before systemic failure, as elite investors’ overlapping stakes contained rather than amplified stress. The paper reframes Antioquia’s free banking episode as a case of endogenous stability and offers a portable tool for assessing systemic risk in other pre-modern settings.