Does Increased Shareholder Liability Always Reduce Bank Moral Hazard?

75 Pages Posted: 27 Dec 2017 Last revised: 1 Apr 2020

See all articles by Haelim Anderson

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation

Daniel Barth

Board of Governors of the Federal Reserve System

Dong Beom Choi

Seoul National University - Business School

Multiple version iconThere are 4 versions of this paper

Date Written: September 15, 2019

Abstract

Scholars and regulators often maintain that extended shareholder liability reduces bank risk-taking. Prior to the Great Depression, double liability on bank shareholders was the predominant institutional framework aimed to constrain moral hazard. We examine whether increased shareholder liability effectively moderated bank risk-taking. We find no evidence that double liability reduced risk-taking prior to the Great Depression, but do find evidence that deposits in double liability banks were stickier during the Great Depression, suggesting double-liability banks faced less risk of bank runs. Shifting losses from depositors to shareholders weakened market discipline and attenuated the effects of increased skin in the game.

Keywords: Double Liability, Moral Hazard, Market Discipline, Bank Runs, Great Depression

JEL Classification: G21, G28, N22

Suggested Citation

Anderson, Haelim and Barth, Daniel and Choi, Dong Beom, Does Increased Shareholder Liability Always Reduce Bank Moral Hazard? (September 15, 2019). Available at SSRN: https://ssrn.com/abstract=3091914 or http://dx.doi.org/10.2139/ssrn.3091914

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation ( email )

550 17th Street NW
Washington, DC 20429
United States

Daniel Barth

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Dong Beom Choi (Contact Author)

Seoul National University - Business School ( email )

Seoul
Korea, Republic of (South Korea)

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