Working Paper

Moral hazard and Texas banking in the 1920s.

Abstract: Using recently collected examination data from a sample of Texas state-chartered banks over the period 1919-26, the role of moral hazard in increasing ex-ante asset risk is analyzed. During this period, a state-run deposit insurance system was in place that was mandatory for all state-chartered banks in Texas. Nationally chartered banks were not allowed to participate in the insurance program. Analyzing individual bank-level data, we find evidence that declines in capitalization were positively correlated with increases in loan concentrations at insured banks. We argue that this is consistent with a moral-hazard effect at work. No such relationship is found between capitalization and risk at uninsured banks.

Keywords: Banks and banking - Texas;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Financial Industry Studies Working Paper

Publication Date: 1996

Number: 96-1