Deposit Insurance And Moral Hazard: Evidence From Texas Banking In The 1920s
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.
Volume (Year): 62 (2002)
Issue (Month): 03 (September)
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