Stealing Deposits: Deposit Insurance, Risk-Taking and the Removal of Market Discipline in Early 20th Century Banks

Charles Calomiris and Matthew Jaremski

No 22692, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Deposit insurance reduces liquidity risk but it also can increase insolvency risk by encouraging reckless behavior. A handful of U.S. states installed deposit insurance laws before the creation of the FDIC in 1933, and those laws only applied to some depository institutions within those states. These experiments present a unique testing ground for investigating the effect of deposit insurance. We show that deposit insurance increased risk by removing market discipline that had been constraining erstwhile uninsured banks. Taking advantages of the rising world agricultural prices during World War I, insured banks increased their insolvency risk, and competed aggressively for the deposits of uninsured banks operating nearby. When prices fell after the War, the insured systems collapsed and suffered especially high losses.

JEL-codes: G21 G28 N22 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his and nep-ias
Note: CF DAE
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Citations: View citations in EconPapers (19)

Published as Charles W. Calomiris & Matthew Jaremski, 2019. "Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20th‐Century Banks," Journal of Finance, American Finance Association, vol. 74(2), pages 711-754, April.

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Journal Article: Stealing Deposits: Deposit Insurance, Risk‐Taking, and the Removal of Market Discipline in Early 20th‐Century Banks (2019)
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