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Bank liability insurance schemes before 1865

Author

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  • Warren E. Weber
Abstract
Prior to the Civil War several states established bank liability insurance schemes of two basic types. One was an insurance fund, in which member banks paid into a state-run fund that would pay losses of bank creditors. The other was a mutual guarantee system, in which survivor banks were legally responsible the liabilities of any bank that became insolvent. Both schemes did well at insuring bank creditors, but neither prevented bank panics. Bank failure rates were somewhat higher for banks that were part of these schemes. The experience with these schemes shows that regulatory incentives matter for controlling moral hazard. The schemes that provided the most control of moral hazard were those that had a high degree of mutuality of losses borne by all banks participating in the scheme.

Suggested Citation

  • Warren E. Weber, 2010. "Bank liability insurance schemes before 1865," Working Papers 679, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:679
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    More about this item

    Keywords

    Deposit insurance; Moral hazard; Bank notes;
    All these keywords.

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