TY - JOUR AU - Mitchener, Kris James AU - Richardson, Gary TI - Does "Skin in the Game" Reduce Risk Taking? Leverage, Liability and the Long-Run Consequences of New Deal Banking Reforms JF - National Bureau of Economic Research Working Paper Series VL - No. 18895 PY - 2013 Y2 - March 2013 DO - 10.3386/w18895 UR - http://www.nber.org/papers/w18895 L1 - http://www.nber.org/papers/w18895.pdf N1 - Author contact info: Kris James Mitchener Department of Economics Leavey School of Business Santa Clara University Santa Clara, CA 95053 Tel: 408/554-4340 Fax: 408/554-2331 E-Mail: kmitchener@scu.edu Gary Richardson Department of Economics University of California, Irvine 3155 Social Sciences Plaza Irvine, CA 92697-5100 Tel: 949/824-3189 Fax: 949/824-2182 E-Mail: garyr@uci.edu M1 - published as Kris James Mitchener, Gary Richardson. "Does "Skin in the Game" Reduce Risk Taking? Leverage, Liability, and the Long-run Consequences of the New Deal Banking Reforms," in Price Fishback, organizer, "The Microeconomics of New Deal Policy" Elsevier, Explorations in Economic History, 50(4) (2013) AB - This essay examines how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced risk taking in the financial sector of the U.S. economy. The analysis focuses on contingent liability of bank owners for losses incurred by their firms and how the elimination of this liability influenced leverage and lending by commercial banks. Using a new panel data set, we find contingent liability reduced risk taking. In states with contingent liability, banks used less leverage and converted each dollar of capital into fewer loans, and thus could survive larger loan losses (as a fraction of their portfolio) than banks in limited liability states. In states with limited liability, banks took on more leverage and risk, particularly in states that required banks with limited liability to join the Federal Deposit Insurance Corporation. In the long run, the New Deal replaced a regime of contingent liability with deposit insurance, stricter balance sheet regulation, and increased capital requirements, shifting the onus of risk management from bankers to state and federal regulators. ER -