Faculty Sponsor: Richard S. Grossman
Sandrine Alouidor
I am a rising junior, majoring in economics and history. At Wesleyan, I am an Orientation Leader, a course assistant for Working with Stata and Working with R, and a research assistant for Professor Grossman. I also am the financial manager for the Ankh, the people of color arts magazine on campus. Outside of campus life, I love to read, write, and play piano and violin.
Abstract: Understanding what regulations, if any, drive bank stability and risk-taking is crucial to preventing failures and maintaining a stable banking system. Particularly of interest are regulations on multiple liability, which required bank shareholders to pay more than their shares in the case of failure. The time between the Civil War and the advent of deposit insurance is ideal for answering these questions, as differing liability and regulatory regimes and a parallel national banking system allow for examination of regulatory impact and controls for economic conditions. Fragmentary regulatory and balance sheet data from states in the contiguous United States during 1865 to 1930 were combined into one cohesive dataset. Using a fractionalized generalized linear model with two-way fixed effects, we find a statistically significant relationship between multiple liability and state bank asset failure rates less than 50%, but no statistically significant relationship for state bank failure rates less than 50%, after controlling for the national bank asset failure rate, minimum director share laws, and minimum capital to begin a bank. However, these results are preliminary, and possible endogeneity exists and may impact results. The fragmentary nature of the data may also impact results. Further research includes parsing out motivations for regulation, isolating differences between recessions and non-recessions, exploring the impact of lagging multiple liability, and including reserve cities within analysis.
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