Double Liability in a Branch Banking System: Historical Evidence from Canada

Abstract

We investigate the effects of the abolition of double liability requirement in years 1934-50 in Canada on bank risk-taking and lending behavior. Under the double liability rule, the shareholders of a bank are liable up to twice the amount of their subscribed shares in the case of bankruptcy. Using historical balance sheet and accounting data, we show that the abolition of double liability, linked to the redemption of notes in circulation, was not accompanied by increased bank risk taking in Canada. Our findings are consistent with the literature that focuses on uniform regulations and nationwide branching as key financial stability elements in Canada.

Shareholder Liability and Bank Failure

“…Analyzing different datasets and time periods, studies find mixed results. Some papers report a positive effect of limited liability on leverage (Grossman 2001, Mitchener and Richardson 2013, Koudijs, Salisbury, and Sran 2019, while others find no or a negative effect (Evans and Quigley 1995, Bodenhorn 2015, Grodecka and Kotidis 2016, Anderson and Watugala 2017, Anderson, Barth, and Choi 2018.…”