Shareholder Liability and Bank Failure
73 Pages Posted: 5 Dec 2019 Last revised: 29 Jun 2021
Date Written: November 20, 2019
Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.
Keywords: Bank Risk Taking, Limited Liability, Double Liability, Financial Crises, Great Depression
JEL Classification: G21, G28, G32, N22
Suggested Citation: Suggested Citation