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Deposit Insurance And Moral Hazard: Evidence From Texas Banking In The 1920s

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  • Hooks, Linda M.
  • Robinson, Kenneth J.

Abstract

Using recently collected examination data from a sample of Texas state-chartered banks over the period 1919–1926, the role of moral hazard in increasing ex-ante asset risk is explored. Analyzing individual bank-level data, we find that the existence of deposit insurance for state-chartered banks increased their likelihood of failure. Increases in loan concentrations followed declines in capitalization at insured state banks. However, we find no statistically significant relationship between loan concentrations and capitalization at uninsured national banks or at state banks before the introduction of deposit insurance. These results show a moral-hazard effect at work.

Suggested Citation

  • Hooks, Linda M. & Robinson, Kenneth J., 2002. "Deposit Insurance And Moral Hazard: Evidence From Texas Banking In The 1920s," The Journal of Economic History, Cambridge University Press, vol. 62(3), pages 833-853, September.
    • Handle: RePEc:cup:jechis:v:62:y:2002:i:03:p:833-853_00
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    Cited by:

    1. Agusman, Agusman & Cullen, Grant S. & Gasbarro, Dominic & Monroe, Gary S. & Zumwalt, J. Kenton, 2014. "Government intervention, bank ownership and risk-taking during the Indonesian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 114-131.
    2. Opiela, Timothy P., 2004. "Was there an implicit full guarantee at financial institutions in Thailand? Evidence of risk pricing by depositors," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 519-541, September.
    3. Kariastanto, Bayu, 2011. "Blanket guarantee, deposit insurance, and risk-shifting incentive: evidence from Indonesia," MPRA Paper 35557, University Library of Munich, Germany.
    4. Brahim Guizani & Wako Watanabe, 2010. "The Deposit Insurance and the Risk-Shifting Incentive Evidence from the Blanket Deposit Insurance in Japan," Keio/Kyoto Joint Global COE Discussion Paper Series 2010-004, Keio/Kyoto Joint Global COE Program.
    5. Gong, Rui & Page, Frank, 2016. "Shadow banks and systemic risks," LSE Research Online Documents on Economics 105809, London School of Economics and Political Science, LSE Library.
    6. Matthew Jaremski & David C. Wheelock, 2020. "Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(7), pages 1719-1754, October.
    7. Kiss, Hubert J. & Rodriguez-Lara, Ismael & Rosa-Garcia, Alfonso, 2022. "Preventing (panic) bank runs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    8. Jonathan Carroll & Shino Takayama, 2014. "A hierarchical agency model of deposit insurance," Annals of Finance, Springer, vol. 10(2), pages 267-290, May.
    9. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3433-3452, December.
    10. Alaa Alaabed & Mansur Masih & Abbas Mirakhor, 2016. "Investigating risk shifting in Islamic banks in the dual banking systems of OIC member countries: An application of two-step dynamic GMM," Risk Management, Palgrave Macmillan, vol. 18(4), pages 236-263, December.
    11. Gary Richardson, 2007. "Deposit Insurance and Moral Hazard: Capital, Risk, Malfeasance, and Mismanagement," Econ Journal Watch, Econ Journal Watch, vol. 4(3), pages 296-302, September.
    12. Guizani, Brahim & Watanabe, Wako, 2016. "The effects of public capital infusions on banks’ risk-shifting to the deposit insurance system in Japan," Journal of Financial Stability, Elsevier, vol. 26(C), pages 15-30.
    13. Bixter, Michael T. & Luhmann, Christian C., 2014. "Shared losses reduce sensitivity to risk: A laboratory study of moral hazard," Journal of Economic Psychology, Elsevier, vol. 42(C), pages 63-73.

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