For Richer, for Poorer Banker's Liability and Risk Taking in New England, 1867-1880

For Richer, for Poorer Banker's Liability and Risk Taking in New England, 1867-1880

By Peter A.E. Koudijs, Laura Salisbury, Gurpal Sran
March 28,2018Working Paper No. 3675

We study whether banks are riskier if managers have less liability. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that limited liability for newly wedded bankers. We find that banks with managers who married after a legal change had more leverage, were more likely to “evergreen” loans and violate lending rules and lost more capital and deposits in the Long Depression of 1873-1878. This effect was most pronounced for bankers whose wives were relatively wealthy. We find no evidence that limiting liability increased capital investment at the county level.