Shareholder Liability and Bank Failure

Dirk Jenter, Felipe Aldunate, Arthur Korteweg and Peter Koudijs

No 16309, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Limited liability; Bank risk taking; Financial crises; Great depression (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 N22 (search for similar items in EconPapers)
Date: 2021-06
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Working Paper: Shareholder Liability and Bank Failure (2021)
Working Paper: Shareholder liability and bank failure (2021)
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