Discussion Paper Details

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Title: Shareholder Liability and Bank Failure

Author(s): Felipe Aldunate, Dirk Jenter, Arthur Korteweg and Peter Koudijs

Publication Date: June 2021

Keyword(s): bank risk taking, financial crises, Great Depression and limited liability

Programme Area(s): Economic History and Financial Economics

Abstract: 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.

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Bibliographic Reference

Aldunate, F, Jenter, D, Korteweg, A and Koudijs, P. 2021. 'Shareholder Liability and Bank Failure'. London, Centre for Economic Policy Research.