Moral hazard and Texas banking in the 1920s

Linda M. Hooks and Kenneth Robinson

No 96-1, Financial Industry Studies Working Paper from Federal Reserve Bank of Dallas

Abstract: Using recently collected examination data from a sample of Texas state-chartered banks over the period 1919-26, the role of moral hazard in increasing ex-ante asset risk is analyzed. During this period, a state-run deposit insurance system was in place that was mandatory for all state-chartered banks in Texas. Nationally chartered banks were not allowed to participate in the insurance program. Analyzing individual bank-level data, we find evidence that declines in capitalization were positively correlated with increases in loan concentrations at insured banks. We argue that this is consistent with a moral-hazard effect at work. No such relationship is found between capitalization and risk at uninsured banks.

Keywords: Banks; and; banking; -; Texas (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (2)

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