Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/236710 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9168
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
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.
Subjects: 
limited liability
bank risk taking
financial crises
Great Depression
JEL: 
G21
G28
G32
N22
Document Type: 
Working Paper
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