Re-Thinking Financial Reform

Over at National Review Online I advocate reviving double liability for banks. Here is an excerpt:

The banking system in the U.S. hasn’t always been like this. Between the Civil War and the Great Depression, banks did not have limited liability. Instead, they had double liability. When a bank became insolvent, shareholders lost their initial investment (just as they do under limited liability today). But in addition, a receiver would assess the value of the asset holdings of the bank to determine the par value of the outstanding shares. Shareholders had to pay an amount that could be as high as the current value of their shares in compensation to depositors and creditors.

Shareholders and bank managers (who were often shareholders themselves) thus had a stronger incentive than they do today to assess the risk of investments accurately, because they were risking not just their initial investment but the total value of the banks’ assets. Shareholders also had an incentive to better monitor bank managers and the bank balance sheet.

One response to “Re-Thinking Financial Reform

  1. Great post, you make an excellent point. I’ve been reading paper after paper positing new methods for shoring up the accountability of big banks, and I cannot help but wonder why we don’t look to history more often. Thanks for sharing!

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