Discussion paper

DP16309 Shareholder Liability and Bank Failure

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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Citation

Jenter, D, F Aldunate, A Korteweg and P Koudijs (eds) (2021), “DP16309 Shareholder Liability and Bank Failure”, CEPR Press Discussion Paper No. 16309. https://cepr.org/publications/dp16309