Working Paper: NBER ID: w12719
Authors: Gary Richardson
Abstract: Hooks and Robinson argue that moral hazard induced by deposit insurance induced banks to invest in riskier assets in Texas during the 1920s. Their regressions suggest this manifestation of moral hazard may explain a portion of the events that occurred during the 1920s, but some other phenomena, hitherto overlooked, must also be at work. Economic logic and evidence form the archives of the Board of Governors suggest that phenomenon is mismanagement and defalcation by corporate officers, which increases when insurance reduces depositors' incentives to monitor and react to the safety and soundness of banks.
Keywords: deposit insurance; moral hazard; bank risk; mismanagement; Texas banking
JEL Codes: E42; E44; E65; N1; N13; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deposit insurance (G28) | increased risk-taking behavior (D91) |
| Lower capitalization (D29) | increased asset risk (G32) |
| Higher proportion of loans (G21) | lower failure rates (L15) |
| Deposit insurance (G28) | bank failures (G21) |