A Comment Concerning Deposit Insurance and Moral Hazard

Gary Richardson

NBER Working Paper No. 12719
Issued in December 2006
NBER Program(s):   DAE   CF   ME

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.

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Acknowledgments

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