The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s
AbstractThis paper studies the effects of deposit insurance on bank behavior using individual bank data from Kansas in the 1920s. Kansas banks were severely stressed by the collapse of agricultural prices in 1920 and resulting increase in farm mortgage defaults. Because membership in the state deposit insurance system was voluntary, it is possible to compare the behavior of insured and non-insured banks facing similar exogenous circumstances. We find that deposit insurance encouraged excessive risk-taking, which helps to explain the comparatively high failure rate of insured banks. The deposit insurance fund ultimately failed to reimburse many depositors of failed banks. We find, however, no evidence of a decline in the credibility of insurance, and hence in the ability of insured banks to take excessive risks, before the systemâs collapse in 1926.
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Bibliographic InfoArticle provided by Elsevier in its journal Explorations in Economic History.
Volume (Year): 31 (1994)
Issue (Month): 3 (July)
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Web page: http://www.elsevier.com/locate/inca/622830
Other versions of this item:
- David C. Wheelock & Subal C. Kumbhaker, 1992. "The slack banker dances: deposit insurance and risk-taking in the banking collapse of the 1920s," Working Papers 1992-002, Federal Reserve Bank of St. Louis.
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