Double liability and bank risk taking

This paper examines double liability as it existed in the United States prior to the Great Depression and assesses its impact upon bank risk taking. Under double liability, shareholders of failing banks could lose, in addition to the initial purchase price of shares, an amount equal to the par value of shares owned. This paper assesses whether or not banks chartered in states with double liability laws undertook less risk than banks operating under conventional limited liability. The results suggest that double liability did reduce bank risk taking, but did not guarantee bank stability in times of widespread financial distress.