Unlimiting Unlimited Liability: Legal Equality for Swedish Banks with Alternative Shareholder Liability Regimes, 1897–1903

Abstract

This article examines the aftermath of the 1897 Riksbank Act in Swedish banking. The act placed banks with unlimited liability and those with limited liability on equal footing, removing the note-issuing privileges of the former. We consider whether changes in risk preferences occurred subsequent to the act, or whether extended liability was a sufficient deterrent. We conclude that when legal differences were removed, lower transaction costs for unlimited liability banks (ULBs) spurred aggressive competition, reflected in narrower interest spreads relative to limited liability banks (LLBs). ULBs also took on greater leverage and held less liquidity, which supports the Coasean interpretation that the shareholder liability regime mattered little. After 1897, ULB shareholders continued to receive higher dividends, enjoyed substantially superior returns on equity, and maintained an array of corporate governance controls to shield themselves against their additional risk.

Monthly credit from and deposits in Swedish commercial banks, 1875-2020

“…Furthermore, even ULBs used deposits as the main source of funding even before they lost the note-issuing rights with the Bank Act enforced in 1903. However, the fact that ULBs increased their leverage considerably after reform, even compared to LLBs, implies that reserve requirements did have a notable impact on money creation (Ögren and Kenny 2021). This also implies that there was a considerable difference between the possibilities for ULBs and LLBs prior to 1903 in this respect.…”