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For Richer, for Poorer: Bankers' Liability and Bank Risk in New England, 1867 to 1880

Journal: Journal of Finance

Date: 20210601

Author: Koudijs, Peter; Salisbury, Laura; Sran, Gurpal

Abstract:
We study whether banks are riskier if managers have less liability. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that limited liability for newly wedded bankers. We find that banks with managers who married after a law had higher leverage, delayed loss recognition, made more risky and fraudulent loans, and lost more capital and deposits in the Long Depression of 1873 to 1878. These effects were most pronounced for bankers with the largest reduction in liability. We find no evidence that limiting liability increased firm investment at the county level.

Link: Google Scholar

Key Findings

Higher Bank Risk

Banks managed by presidents married after Married Women's Property Acts (MWPAs) had higher leverage ratios and were more likely to make risky loans

Delayed Loss Recognition

Protected bankers were less likely to write down bad loans, continuing to pay dividends while delaying recognition of losses

Worse Crisis Performance

Banks with protected presidents experienced larger losses and deposit withdrawals during the 1873-1878 Long Depression

Bank Leverage and Protection Status

  • Unprotected banks had average loans-to-capital ratio of 1.277
  • Protected banks had higher ratio of 1.375
  • Difference represents ~7.7% higher leverage for protected banks

Loss Recognition Patterns

  • Unprotected banks wrote down 0.57% of loans in arrears
  • Protected banks wrote down only 0.33% of loans in arrears
  • 42% lower rate of loss recognition for protected banks

Crisis Period Performance

  • Deposit growth 1873-1878: +4.3% for unprotected vs -10.7% for protected banks
  • Loan growth 1873-1878: -9.2% for unprotected vs -17.1% for protected banks
  • Protected banks experienced significantly larger declines during crisis

Contribution and Implications

  • First empirical evidence that increased personal liability for bank managers reduces risk-taking behavior
  • Demonstrates limitations of depositor discipline even without deposit insurance
  • Provides historical support for modern proposals to increase banker accountability
  • Shows unintended consequences of limiting liability through marital property laws

Data Sources

  • Leverage chart constructed using data from Table IV showing mean loans-to-capital ratios
  • Loss recognition chart based on data from Table VII showing fraction of loans written down
  • Crisis performance visualization uses figures from Table IV showing log changes in deposits and loans between 1873-1878