DP16309 Shareholder Liability and Bank Failure
|Author(s):||Felipe Aldunate, Dirk Jenter, Arthur Korteweg, Peter Koudijs|
|Publication Date:||June 2021|
|Keyword(s):||bank risk taking, financial crises, Great Depression, limited liability|
|JEL(s):||G21, G28, G32, N22|
|Programme Areas:||Financial Economics, Economic History|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16309|
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.