A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance

Journal of Money, Credit and Banking, Vol. 30, No. 3, Part 2 (November 1998)

Posted: 24 Mar 1998

See all articles by Edward J. Kane

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Berry K. Wilson

Pace University - Department of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Abstract

Conventional Wisdom holds that the enactment of federal deposit insurance helped small rural banks at the expense of large urban institutions. This paper uses asymmetric-information, agency-cost paradigms from corporate- finance theory and data on bank stock prices to show how deposit insurance could and did help stockholders of large banks. The broadening stockholder distribution of large banks during the stock-market bubble of the late 1920s undermined the efficiency of double liability provisions in controlling incentive conflict among large-bank stakeholders. Federal deposit insurance restored depositor confidence by asking government officials to take over and bond the task of monitoring managerial performance and solvency at U.S. banks.

JEL Classification: G21, N22

Suggested Citation

Kane, Edward J. and Wilson, Berry K., A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance. Journal of Money, Credit and Banking, Vol. 30, No. 3, Part 2 (November 1998). Available at SSRN: https://ssrn.com/abstract=69010

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Berry K. Wilson

Pace University - Department of Finance and Economics ( email )

Lubin School of Business
New York, NY 10038
United States

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