Fear and greed: The evolution of double liability in American banking, 1865–1930

Designing deposit insurance scheme under asymmetric information with double liability option

“…3 A few states even had multiple liabilities as measures to contain risk taking by banks. For detailed discussion, please see Grossman (2002). 4 John Raymond LaBrosse, Secretary-General, International Association of Deposit Insurers (IADI) made this remark in his speech at the 16th Anniversary of the Nigeria Deposit Insurance Corporation, 2005.…”

“…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.…”

“…2 From the early days of the Republic, state and federal authorities of the United States have been playing vital roles in adopting various regulations like capital requirements, reserve requirements, liability laws, and various other supervisory and regulatory requirements to contain banks' excess risk taking behaviours to maintain financial stability (Mishkin, 1996). In the period between Civil War and Great Depression, and prior to the emergence of the Federal Reserve as a lender of last resort, in addition to capital (and other balance sheet) requirement, federal and, in some states, state law have imposed double liability to contain risk taking (Grossman, 2002). 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.…”

“…One alternative approach argued in favour of designing fair deposit insurance pricing is to relax the limited liability protections under which banks currently operate (Grossman, 2002). Macey and Miller (1992) find that double liability was more effective than the explicit and implicit deposit insurance policies currently used.…”

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

“…Bekaert, Harvey, and Lumsdaine (2002) study the effects of regulatory changes on growth in emerging capital markets. Grossman (2007) shows that state lawmakers were motivated by fear and greed in their adoption of bank liability laws. Rajan and Zingales (2003) propose an interest group theory of financial development, where both incumbent financiers and industrialists oppose financial development because it breeds competition.…”