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

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...

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Published in:Journal of money, credit and banking credit and banking, 1998-08, Vol.30 (3), p.573-595
Main Authors: Kane, Edward J., Wilson, Berry K.
Format: Article
Language:English
Subjects:
Analysis
Asymmetric information
Bank capital
Bank liabilities
Bank regulation
Bank stocks
Banking industry
Banking law
Banking legislation
Banking regulation
Banking system
Banks
Commercial banks
Comparative analysis
Comparative economics
Costs
Deposit insurance
Economic models
Factories
Financial systems
History
Incentives
Insurance
Liability
Liquidity
National banks
Protocol
Shareholders
Solvency
State banks
Stock prices
Stock splits
Stockholders
Studies
U.S.A
Wealth
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container_title Journal of money, credit and banking
container_volume 30
creator Kane, Edward J.
Wilson, Berry K.
description 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.
doi_str_mv 10.2307/2601258
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ispartof Journal of money, credit and banking, 1998-08, Vol.30 (3), p.573-595
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1538-4616
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source International Bibliography of the Social Sciences (IBSS); ABI/INFORM Global; JSTOR
subjects Analysis
Asymmetric information
Bank capital
Bank liabilities
Bank regulation
Bank stocks
Banking industry
Banking law
Banking legislation
Banking regulation
Banking system
Banks
Commercial banks
Comparative analysis
Comparative economics
Costs
Deposit insurance
Economic models
Factories
Financial systems
History
Incentives
Insurance
Liability
Liquidity
National banks
Protocol
Shareholders
Solvency
State banks
Stock prices
Stock splits
Stockholders
Studies
U.S.A
Wealth
title A Contracting-Theory Interpretation of the Origins of Federal Deposit Insurance
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