IDEAS home Printed from https://ideas.repec.org/a/ejw/journl/v4y2007i3p296-302.html
   My bibliography  Save this article

Deposit Insurance and Moral Hazard: Capital, Risk, Malfeasance, and Mismanagement

Author

Listed:
  • Gary Richardson

Abstract

Hooks and Robinson (2002) argue that deposit insurance in Texas during the 1920s induced banks to invest in riskier assets. Their regressions indicate that this manifestation of moral hazard may explain some of what happened, but not all. Some other mechanism, hitherto overlooked, must also have been at work. A more complete interpretation of what happened recognizes that deposit insurance induced moral hazard of many types. Depositors grew lax in monitoring the safety and soundness of banks. Bankers took advantage of the lack of supervision and advanced their own interests – via malfeasance or mismanagement – at depositors’ expense. Bankers reduced reserve holdings and operated with lower levels of capital. All of these manifestations of moral hazard are consistent with the Hooks’ and Robinson’s regressions. Data drawn from the archives of the Board of Governors highlights the role of malfeasance and mismanagement. In sum, many manifestations of moral hazard afflicted banks in Texas during the 1920s.

Suggested Citation

  • Gary Richardson, 2007. "Deposit Insurance and Moral Hazard: Capital, Risk, Malfeasance, and Mismanagement," Econ Journal Watch, Econ Journal Watch, vol. 4(3), pages 296-302, September.
    • Handle: RePEc:ejw:journl:v:4:y:2007:i:3:p:296-302
    as

    Download full text from publisher

    File URL: https://econjwatch.org/File+download/172/2007-09-richardson-com.pdf?mimetype=pdf
    Download Restriction: no
    File URL: https://econjwatch.org/251
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Editorial Article, 0. "Contents," Economics of Contemporary Russia, Regional Public Organization for Assistance to the Development of Institutions of the Department of Economics of the Russian Academy of Sciences, issue 3.
    2. Hooks, Linda M. & Robinson, Kenneth J., 2002. "Deposit Insurance And Moral Hazard: Evidence From Texas Banking In The 1920s," The Journal of Economic History, Cambridge University Press, vol. 62(3), pages 833-853, September.
    3. Editorial Article, 0. "Contents," Economics of Contemporary Russia, Regional Public Organization for Assistance to the Development of Institutions of the Department of Economics of the Russian Academy of Sciences, issue 2.
    4. Ching-Yi Chung & Gary Richardson, 2006. "Deposit Insurance and the Composition of Bank Suspensions in Developing Economies: Lessons from the State Deposit Insurance Experiments of the 1920S," NBER Working Papers 12594, National Bureau of Economic Research, Inc.
    5. Editorial Article, 0. "Contents," Economics of Contemporary Russia, Regional Public Organization for Assistance to the Development of Institutions of the Department of Economics of the Russian Academy of Sciences, issue 3.
    6. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dennis Coates & Brad R. Humphreys, 2008. "Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?," Econ Journal Watch, Econ Journal Watch, vol. 5(3), pages 294-315, September.
    2. Blair Jenkins, 2009. "Rent Control: Do Economists Agree?," Econ Journal Watch, Econ Journal Watch, vol. 6(1), pages 73-112, January.
    3. Ann Mari May, 2008. "On Gender Balance in the Economics Profession," Econ Journal Watch, Econ Journal Watch, vol. 5(2), pages 193-198, May.
    4. Peter Hennecke, 2021. "The ECB’s New Monetary Policy Strategy," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 56(5), pages 295-298, September.
    5. Toma Lankauskiene, 2021. "Labour Productivity Growth Determinants in the Manufacturing Sector in the Baltic States," ConScienS Conference Proceedings 025tl, Research Association for Interdisciplinary Studies.
    6. Lars P Feld & Volker Wieland, 2021. "The German Federal Constitutional Court Ruling and the European Central Bank’s Strategy," Journal of Financial Regulation, Oxford University Press, vol. 7(2), pages 217-253.
    7. Núñez Ferrer, Jorge, 2021. "Avoiding the Main Risks in the Recovery Plans of Member States," CEPS Papers 32463, Centre for European Policy Studies.
    8. Garett Jones, 2008. "What Is the Right Number of Women? Hints and Puzzles from Cognitive Ability Research," Econ Journal Watch, Econ Journal Watch, vol. 5(2), pages 227-239, May.
    9. Lars Jonung & Eoin Drea, 2010. "It Can't Happen, It's a Bad Idea, It Won't Last: U.S. Economists on the EMU and the Euro, 1989–2002," Econ Journal Watch, Econ Journal Watch, vol. 7(1), pages 1-4–52, January.
    10. Ian Ayres & John J. Donohue, 2009. "Yet Another Refutation of the More Guns, Less Crime Hypothesis—With Some Help From Moody and Marvell," Econ Journal Watch, Econ Journal Watch, vol. 6(1), pages 35-59, January.
    11. Richard Jong-A-Pin & Jakob De Haan, 2008. "Growth Accelerations and Regime Changes: A Correction," Econ Journal Watch, Econ Journal Watch, vol. 5(1), pages 51-58, January.
    12. E. Frank Stephenson & Erin E. Wendt, 2009. "Occupational Licensing: Scant Treatment in Labor Texts," Econ Journal Watch, Econ Journal Watch, vol. 6(2), pages 181-194, May.
    13. Kjerstin Tevik & Geir Selbæk & Knut Engedal & Arnfinn Seim & Steinar Krokstad & Anne-S Helvik, 2019. "Mortality in older adults with frequent alcohol consumption and use of drugs with addiction potential – The Nord Trøndelag Health Study 2006-2008 (HUNT3), Norway, a population-based study," PLOS ONE, Public Library of Science, vol. 14(4), pages 1-24, April.
    14. Yoshihisa Amae & Jens Damm, 2011. "“Whither Taiwanization?†State, Society and Cultural Production in the New Era," Journal of Current Chinese Affairs - China aktuell, Institute of Asian Studies, GIGA German Institute of Global and Area Studies, Hamburg, vol. 40(1), pages 3-17.
    15. Yunhee Park & Hyun-Jung Yun, 2020. "A Multilevel Investigation of Fall Prevention Behavior Among Nursing Staff of South Korean Geriatric Hospitals," Global Journal of Health Science, Canadian Center of Science and Education, vol. 12(10), pages 1-97, September.
    16. Arthur M. Diamond, Jr., 2007. "Thriving at Amazon: How Schumpeter Lives in Books Today," Econ Journal Watch, Econ Journal Watch, vol. 4(3), pages 338-344, September.
    17. Paul Trampe, 2008. "The EITC Disincentive: A Reply to Dr. Hilary Hoynes," Econ Journal Watch, Econ Journal Watch, vol. 5(1), pages 59-65, January.
    18. Michael L. Marlow, 2008. "Honestly, Who Else Would Fund Such Research? Reflections of a Non-Smoking Scholar," Econ Journal Watch, Econ Journal Watch, vol. 5(2), pages 240-268, May.
    19. Junghyun Yoon & Dae-su Kim, 2016. "Empirical Relationships among Technological Characteristics, Global Orientation, and Internationalisation of South Korean New Ventures," Sustainability, MDPI, vol. 8(12), pages 1-13, December.
    20. Philip R. P. Coelho & James E. McClure, 2008. "The Market for Lemmas: Evidence That Complex Models Rarely Operate in Our World," Econ Journal Watch, Econ Journal Watch, vol. 5(1), pages 78-90, January.

    More about this item

    Keywords

    Deposit insurance; moral hazard; defalcation; mismanagement; bank failure;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • N2 - Economic History - - Financial Markets and Institutions
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ejw:journl:v:4:y:2007:i:3:p:296-302. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jason Briggeman (email available below). General contact details of provider: https://edirc.repec.org/data/edgmuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.