IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Does “Skin in the Game” Reduce Risk Taking? Leverage, Liability and the Long-Run Consequences of New Deal Financial Reforms

  • Mitchener, Kris James

    (University of Warwick)

  • Richardson, Gary

    (University of California, Irvine)

Registered author(s):

    We examine how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced risk taking in the financial sector of the U.S. economy. Our analysis focuses on contingent liability of bank owners for losses incurred by their firms and how the elimination of this liability influenced leverage and lending by commercial banks. Using a new panel data set that compares balance sheets of state and national banks, we find contingent liability reduced risk taking, particularly when coupled with rules requiring banks to join the Federal Deposit Insurance Corporation. Leverage ratios are higher in states with limited liability for bank owners. Banks in states with contingent liability converted each dollar of capital into fewer loans, and thus could sustain larger loan losses (as a fraction of their portfolio) than banks in limited liability states. The New Deal replaced a regime of contingent liability with stricter balance sheet regulation and increased capital requirements, shifting the onus of risk management from banks to state and federal regulators. By separating investment banks from commercial banks, the Glass-Steagall Act left investment banks to manage their own leverage, a feature of financial regulation that, in part, depended on their partnership structure.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/research/wpfeed/118_2013_mitchener.pdf
    Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Jane Snape)


    Download Restriction: no

    Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 118.

    as
    in new window

    Length:
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:cge:wacage:118
    Contact details of provider: Postal: CV4 7AL COVENTRY
    Phone: +44 (0) 2476 523202
    Fax: +44 (0) 2476 523032
    Web page: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Demirguc-Kunt, Asl' & Kane, Edward J., 2001. "Depositinsurance around the globe : where does it work?," Policy Research Working Paper Series 2679, The World Bank.
    2. Kroszner, Randall S & Rajan, Raghuram G, 1994. "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933," American Economic Review, American Economic Association, vol. 84(4), pages 810-32, September.
    3. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
    4. Vernon, Jack R, 1970. "Ownership and Control Among Large Member Banks," Journal of Finance, American Finance Association, vol. 25(3), pages 651-57, June.
    5. Berry K. Wilson & Edward J. Kane, 1996. "The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders," NBER Working Papers 5848, National Bureau of Economic Research, Inc.
    6. Randall S. Kroszner, 1998. "Rethinking Bank Regulation: A Review Of The Historical Evidence," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(2), pages 48-58.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cge:wacage:118. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Snape)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.