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The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s

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  • Wheelock David C.
  • Kumbhakar Subal C.

Abstract

This 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 system?s collapse in 1926.
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Suggested Citation

  • Wheelock David C. & Kumbhakar Subal C., 1994. "The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s," Explorations in Economic History, Elsevier, vol. 31(3), pages 357-375, July.
    • Handle: RePEc:eee:exehis:v:31:y:1994:i:3:p:357-375
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    Cited by:

    1. Charles W. Calomiris & Christopher Hanes, 1994. "Historical Macroeconomics and American Macroeconomic History," NBER Working Papers 4935, National Bureau of Economic Research, Inc.
    2. 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.
    3. David G. Mayes & Aarno Liuksila & Thorsten Beck & Bethany Blowers & Henk Brouwer & Peik Granlund & Christos Hadjiemmanuil & Gerbert Hebbink & Eva H. G. Hüpkes & Eigil Mølgaard & Jón Sigurðsson & Gary , 2004. "Who Pays for Bank Insolvency?," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-52391-3, October.
    4. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3433-3452, December.
    5. Eugene N. White, 2011. ""To Establish a More Effective Supervision of Banking": How the Birth of the Fed Altered Bank Supervision," NBER Working Papers 16825, National Bureau of Economic Research, Inc.
    6. Ramírez, Carlos D., 2009. "Bank fragility, "money under the mattress", and long-run growth: US evidence from the "perfect" Panic of 1893," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2185-2198, December.
    7. 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.
    8. Jacqueline Khorassani, 2000. "An empirical study of depositor sensitivity to bank risk," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 24(1), pages 15-27, March.

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