Double Liability and Bank Risk Taking

Carrots and sticks in bank governance: time for a bigger stick?

“…Evidence from this era supports the two projected outcomes of removing limited limited liability postulated earlier. Grossman (2001), for example, finds that banks subject to double liability held a lower proportion of risky assets, had higher capital and liquidity ratios, and were less likely to fail. And, in another study, Macey and Miller (1992) reveal that, based on the failures of national banks in the US during the regime of limited liability, depositors were suitably protected from losses: on average, for every $1000 in deposits in a given year, depositors lost just 44 cents.…”

British Financial Crises since 1825

“…Prior to the recent crisis, some scholars suggested that contingent capital in its historical form should be re-introduced into banking systems (Macey and Miller, 1992;Grossman, 2001). More recently, Conti-Brown has suggested that systematically important financial institutions should have pro rata unlimited liability (Conti-Brown, 2011).…”

“…Although contingent capital was commonplace in other banking systems, particularly in their formative years, there have been few studies of its stability-enhancing role. For example, double liability in the US national banking system was effective at protecting depositors, and contingent liability discouraged bank risk-taking in the early-twentieth-century US banking system (Esty, 1998;Macey and Miller, 1992;Grossman, 2001). Similarly, a study of the history of early joint-stock banking systems around the world found that the presence of unlimited liability was correlated with the stability of these banking systems (Hickson and Turner, 2004).…”

Designing deposit insurance scheme under asymmetric information with double liability option

“…Under the double liability system, a failing bank's shareholders could be liable to, in addition to the purchase price of the shares, an extra amount up to the par value of the shares owned. 3 Grossman (2001Grossman ( , 2002 extensively investigates the success and failure of the banking system during the period of the Civil War and the Great Depression and indicates that prior to the Great Depression, states that implemented double liability or triple liability were financially stable and banks of these states did not engage in excess risk taking and yet were able to continue sustained economic growth and stable economic expansion. However, during the Great Depression, it is observed that banks of the states with double liability or multiple liabilities, along with the banks of the other states that did not adopt double liability, also engaged in excess risk taking that made the regulators and policy makers to believe that double liability was ineffective in containing bank from risk taking.…”