The City of Glasgow Bank failure and the case for liability reform

Charles Goodhart and Natacha Postel-Vinay

No 18799, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The City of Glasgow Bank failure in 1878, which led to large numbers of shareholders becoming insolvent, generated great public concern about their plight, and led directly to the 1879 Companies Act, which paved the way for the adoption of limited liability for all shareholders. In this paper, we focus on the question of why the opportunity was not taken to distinguish between the appropriate liability for ‘insiders,’ i.e. those with direct access to information and power over decisions, as contrasted with ‘outsiders.’ We record that such issues were raised and discussed at the time, and we report why proposals for any such graded liability were turned down. We argue that the reasons for rejecting graded liability for insiders were overstated, both then and subsequently. While we believe that the case for such graded liability needs reconsideration, it does remain a complex matter, as discussed in Section 4.

Keywords: Corporate governance; Limited liability; Bank risk-taking; Financial regulation; Banking and financial crises (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 G32 G39 K22 K29 L20 N23 (search for similar items in EconPapers)
Date: 2024-02
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