Contingent Capital and Bank Risk-Taking among British Banks before World War I
The recent financial turmoil highlights the incentive of highly leveraged financial institutions to take excessive risk, given the protection of limited liability. During the nineteenth and early twentieth century, many banks operated under liability rules which obligated shareholders to bear larger costs of bank insolvency in the form of contingent, or even unlimited liability. This paper examines the empirical relationship between the size of banks’ contingent liability and their risk-taking behavior using data on British banks from 1878-1912. We find that banks with more contingent liability appear to have taken less risk. We also find evidence that the risk-reducing effects of contingent liability were larger for banks with higher leverage, suggesting that contingent capital mitigated moral hazard problem at banks.
|Date of creation:||Aug 2011|
|Publication status:||forthcoming in the Economic History Review|
|Contact details of provider:|| Postal: PAC 123, 238 Church Street, Middletown, CT 06459-0007|
Web page: http://www.wesleyan.edu/econ/
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.:
- Esty, Benjamin C., 1998. "The impact of contingent liability on commercial bank risk taking," Journal of Financial Economics, Elsevier, vol. 47(2), pages 189-218, February.
- Hickson, Charles R. & Turner, John D., 2003. "The Trading of Unlimited Liability Bank Shares in Nineteenth-Century Ireland: The Bagehot Hypothesis," The Journal of Economic History, Cambridge University Press, vol. 63(04), pages 931-958, December.
- Richard S. Grossman, 2010. "Unsettled Account: The Evolution of Banking in the Industrialized World since 1800," Economics Books, Princeton University Press, edition 1, number 9219.
- Graeme G. Acheson & John D. Turner, 2006. "The impact of limited liability on ownership and control: Irish banking, 1877-1914 -super-1," Economic History Review, Economic History Society, vol. 59(2), pages 320-346, 05.
- Saunders, Anthony & Strock, Elizabeth & Travlos, Nickolaos G, 1990. " Ownership Structure, Deregulation, and Bank Risk Taking," Journal of Finance, American Finance Association, vol. 45(2), pages 643-654, June.
- Grossman, Richard S., 2001. "Charters, corporations and codes: entry restriction in modern banking law," Financial History Review, Cambridge University Press, vol. 8(02), pages 107-121, October.
- Glassman, Cynthia A & Rhoades, Stephen A, 1980. "Owner vs. Manager Control Effects on Bank Performance," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 263-70, May.
- Michael Collins, 1989. "The banking crisis of 1878," Economic History Review, Economic History Society, vol. 42(4), pages 504-527, November.
- Hickson, Charles R. & Turner, John D. & McCann, Claire, 2005. "Much ado about nothing: the limitation of liability and the market for 19th century Irish bank stock," Explorations in Economic History, Elsevier, vol. 42(3), pages 459-476, July.
- Magnus Blomström & Jennifer Corbett & Fumio Hayashi & Anil Kashyap, 2003. "Structural Impediments to Growth in Japan," NBER Books, National Bureau of Economic Research, Inc, number blom03-1, Enero.
- Carr, Jack L & Mathewson, G Frank, 1988. "Unlimited Liability as a Barrier to Entry," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 766-784, August.
- Broz, J. Lawrence & Grossman, Richard S., 2004. "Paying for privilege: the political economy of Bank of England charters, 1694-1844," Explorations in Economic History, Elsevier, vol. 41(1), pages 48-72, January.
- Graeme G. Acheson & John D. Turner, 2011. "Investor behaviour in a nascent capital market: Scottish bank shareholders in the nineteenth century," Economic History Review, Economic History Society, vol. 64(1), pages 188-213, February.
- Ouarda Merrouche & Enrica Detragiache & Asli DemirgÃ¼Ã§-Kunt, 2010.
"Bank Capital; Lessons From the Financial Crisis,"
IMF Working Papers
10/286, International Monetary Fund.
- Barth,James R. & Caprio,Gerard & Levine,Ross, 2008.
"Rethinking Bank Regulation,"
Cambridge University Press, number 9780521709309, October.
- Grossman, Richard S., 2002. "New Indices Of British Equity Prices, 1870 1913," The Journal of Economic History, Cambridge University Press, vol. 62(01), pages 121-146, March.
- Mitsuhiro Fukao, 2002.
"Financial Sector Profitability and Double-Gearing,"
NBER Working Papers
9368, National Bureau of Economic Research, Inc.
- Grossman, Richard S, 2001. "Double Liability and Bank Risk Taking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 143-59, May.
- Acheson, Graeme G. & Turner, John D., 2008. "The death blow to unlimited liability in Victorian Britain: The City of Glasgow failure," Explorations in Economic History, Elsevier, vol. 45(3), pages 235-253, July.
- Grossman, Richard S., 2007. "Fear and greed: The evolution of double liability in American banking, 1865-1930," Explorations in Economic History, Elsevier, vol. 44(1), pages 59-80, January.
- Hickson, Charles R. & Turner, John D., 2003. "Shareholder liability regimes in nineteenth-century English banking: The impact upon the market for shares," European Review of Economic History, Cambridge University Press, vol. 7(01), pages 99-125, April.
- 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.
- Acheson, Graeme G. & Turner, John D., 2008. "The secondary market for bank shares in nineteenth-century Britain," Financial History Review, Cambridge University Press, vol. 15(02), pages 123-151, October.
When requesting a correction, please mention this item's handle: RePEc:wes:weswpa:2011-003. 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: (Manolis Kaparakis)
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.