A Comment Concerning Deposit Insurance and Moral Hazard

8 Pages Posted: 6 Dec 2006 Last revised: 3 Oct 2022

See all articles by Gary Richardson

Gary Richardson

University of California at Irvine; National Bureau of Economic Research

Date Written: December 2006

Abstract

Hooks and Robinson argue that moral hazard induced by deposit insurance induced banks to invest in riskier assets in Texas during the 1920s. Their regressions suggest this manifestation of moral hazard may explain a portion of the events that occurred during the 1920s, but some other phenomena, hitherto overlooked, must also be at work. Economic logic and evidence form the archives of the Board of Governors suggest that phenomenon is mismanagement and defalcation by corporate officers, which increases when insurance reduces depositors' incentives to monitor and react to the safety and soundness of banks.

Suggested Citation

Richardson, Gary, A Comment Concerning Deposit Insurance and Moral Hazard (December 2006). NBER Working Paper No. w12719, Available at SSRN: https://ssrn.com/abstract=948181

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