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Does "skin in the game" reduce risk taking? Leverage, liability and the long-run consequences of new deal financial reforms
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Mitchener , Kris James and Richardson, Gary (2013) Does "skin in the game" reduce risk taking? Leverage, liability and the long-run consequences of new deal financial reforms. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2013 (Number 118).
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Text (Working paper)
WRAP_118_2013_mitchener.pdf - Published Version Download (1009Kb) | Preview |
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
We examine how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced
risk taking in the financial sector of the U.S. economy. Our analysis focuses on contingent liability of
bank owners for losses incurred by their firms and how the elimination of this liability influenced
leverage and lending by commercial banks. Using a new panel data set that compares balance sheets
of state and national banks, we find contingent liability reduced risk taking, particularly when coupled
with rules requiring banks to join the Federal Deposit Insurance Corporation. Leverage ratios are
higher in states with limited liability for bank owners. Banks in states with contingent liability
converted each dollar of capital into fewer loans, and thus could sustain larger loan losses (as a
fraction of their portfolio) than banks in limited liability states. The New Deal replaced a regime of
contingent liability with stricter balance sheet regulation and increased capital requirements, shifting
the onus of risk management from banks to state and federal regulators. By separating investment
banks from commercial banks, the Glass-Steagall Act left investment banks to manage their own
leverage, a feature of financial regulation that, in part, depended on their partnership structure
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Banks and banking -- United States -- 20th century, New Deal, 1933-1939 -- United States, Depressions -- 1929 -- United States, Risk -- United States | ||||
Series Name: | CAGE Online Working Paper Series | ||||
Publisher: | Department of Economics, University of Warwick | ||||
Place of Publication: | Coventry, UK | ||||
Official Date: | 2013 | ||||
Dates: |
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Volume: | Volume 2013 | ||||
Number: | Number 118 | ||||
Number of Pages: | 39 | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Date of first compliant deposit: | 1 August 2016 | ||||
Date of first compliant Open Access: | 1 August 2016 |
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