Choosing To Fail: Managerial Liability, Risk Management and Voluntary Exits of Banks

We study how extended stockholder liability shaped bank resolution during and after the Panic of 1893, comparing California state banks (unlimited liability) with national banks (double liability). Using newly assembled data linking California state bank presidents to census records and national bank stock ownership data from Examination Reports, we measure managers’ personal exposures to extended liability. For California state banks, traditional fundamentals predict involuntary liquidations but do not explain voluntary exits. Instead, voluntary exits are driven by managers’ liability exposure, local economic risk, and personal wealth, consistent with managers responding to unlimited liability by initiating preemptive, orderly resolutions. For national banks under double liability, voluntary and involuntary liquidations are more similar, and personal exposure plays a smaller role in risk management. These findings show that substantial personal liability exposure can operate for modern prudential tools like compensation clawbacks and living wills. However, such extended liability also magnifies credit contractions during downturns, highlighting a fundamental tradeoff between micro-stability and macroeconomic fragility in regulatory design.