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Moral hazard and Texas banking in the 1920s

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  • Linda M. Hooks
  • Kenneth J. Robinson

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.

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File URL: http://www.dallasfed.org/assets/documents/banking/fiswp/fiswp9601.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Financial Industry Studies Working Paper with number 96-1.

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Date of creation: 1996
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Handle: RePEc:fip:feddfi:96-1

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Keywords: Banks and banking - Texas;

References

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  1. Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 10-30.
  2. Jeffery W. Gunther & Kenneth J. Robinson, 1991. "Empirically assessing the role of moral hazard in increasing the risk exposure of Texas banks," Proceedings 317, Federal Reserve Bank of Chicago.
  3. Wheelock, David C & Kumbhakar, Subal C, 1995. "Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 186-201, February.
  4. Jeffery W. Gunther & Kenneth J. Robinson, 1990. "Empirically assessing the role of moral hazard in increasing the risk exposure of Texas banks," Financial Industry Studies Working Paper 90-4, Federal Reserve Bank of Dallas.
  5. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
  6. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
  7. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  8. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
  11. Smith, Clifford Jr., 1976. "Option pricing : A review," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 3-51.
  12. Brewer, Elijah, III & Mondschean, Thomas H, 1994. "An Empirical Test of the Incentive Effects of Deposit Insurance: The Case of Junk Bonds at Savings and Loan Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 146-64, February.
  13. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
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Cited by:
  1. Kane, Edward J., 1997. "Making bank risk shifting more transparent," Pacific-Basin Finance Journal, Elsevier, vol. 5(2), pages 143-156, June.

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