Extended Shareholder Liability as a Means to Constrain Moral Hazard in Insured Banks

30 Pages Posted: 13 Aug 2015 Last revised: 5 Mar 2017

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Vipin P. Veetil

Indian Institute of Technology Madras

Lawrence H. White

George Mason University - Department of Economics

Date Written: March 24, 2016

Abstract

We explore extended liability for bank shareholders as a method for mitigating moral hazard in insured banks. The dominant approach to maintaining financial stability employs piecemeal regulations concerning specific bank behaviors; we propose this difficult practice can be sidestepped by embracing a legal environment where banks face healthier incentives. We discuss the various kinds of extended liability regimes, show how they worked historically, and address several concerns about the potential downsides of these regimes. We conclude by discussing how extended liability can be used to avoid the difficulties of both ‘microprudential’ and ‘macroprudential’ approaches to systemic stability.

Keywords: Bagehot Hypothesis, deposit insurance, double liability, moral hazard, triple liability, unlimited liability

JEL Classification: E42, E44, G21

Suggested Citation

Salter, Alexander William and Veetil, Vipin P. and White, Lawrence H., Extended Shareholder Liability as a Means to Constrain Moral Hazard in Insured Banks (March 24, 2016). Quarterly Review of Economics and Finance, 2017, Volume 63: 153-160; GMU Working Paper in Economics No. 15-45. Available at SSRN: https://ssrn.com/abstract=2642888 or http://dx.doi.org/10.2139/ssrn.2642888

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Vipin P. Veetil

Indian Institute of Technology Madras

Chennai
India

Lawrence H. White

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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