A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance

Working Paper No. 6451 Conventional wisdom holds that the enactment of federal deposit insurance helped small rural banks at the expense of large urban institutions. This paper uses asymmetric information, agency-cost paradigms from corporate finance theory and data on bank stock prices to show how...

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Bibliographic Details
Published in:NBER Working Paper Series 1998-03, p.6451
Main Authors: Kane, Edward J, Wilson, Berry K
Format: Article
Language:English
Subjects:
Bank stocks
Banking industry
Costs
Deposit insurance
Economic theory
Incentives
Liability
National banks
Stockholders
Wealth
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Summary:Working Paper No. 6451 Conventional wisdom holds that the enactment of federal deposit insurance helped small rural banks at the expense of large urban institutions. This paper uses asymmetric information, agency-cost paradigms from corporate finance theory and data on bank stock prices to show how deposit insurance could and did help stockholders of large banks. The broadening stockholder distribution of large banks during the stock market bubble of the late 1920s undermined the efficiency of double liability provisions in controlling incentive conflict among large bank stakeholders. Federal deposit insurance restored depositor confidence by asking government officials to take over and bond the task of monitoring managerial performance and solvency at U.S. banks.
ISSN:0898-2937
DOI:10.3386/w6451