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The Impact of Extended Liability on Bank Runs

:
Evidence from the Panic of 1893∗
Haelim Park Anderson and Sumudu W. Watugala†
January 2017‡

Abstract
Prior to the Great Depression, regulators used extended liability to encourage conservative
banking practices and enhance depositor protection. Using a difference-in-difference setup, we
study how extended liability affected deposit withdrawals during the Panic of 1893. We compare
the capital and portfolio management of national banks that were subject to double liability
(limited liability) to that of state banks that were subject to unlimited liability. We find that
banks with stricter shareholder liability targeted a lower level of default risk and experienced
smaller liquidity shocks. State banks held more secured loans and used less leverage than
national banks. State banks also experienced less deposit withdrawals during the panic. Our
findings show that extended liability contributed to financial stability by discouraging risky
activities and mitigating runs.

JEL classification: G21, N12, N22, D82, E32.

We thank Allen Berger, Charles Kahn, and Dasol Kim for helpful discussions. Any errors remain
the responsibility of the authors.

Anderson: The Office of Financial Research. E-mail: haelim.anderson@ofr.treasury.gov. Watugala:
Cornell University and the Office of Financial Research. E-mail: sumudu@cornell.edu.

View and opinions expressed are those of the authors and do not necessarily represent official positions
or policy of the Office of Financial Research or the U.S. Department of the Treasury. Comments should
be directed to the authors.

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1

Introduction

In response to the financial crisis of 2007-09, several countries increased the coverage of
their deposit insurance programs. Although deposit insurance forestalls financial panics, it increases the instability of the banking system by distorting incentives of savers
and financiers, increasing moral hazard and excessive risk-taking, and contributing to
systemic financial crises (Demirg¨
u¸c-Kunt and Kane (2002); Demirg¨
u¸c-Kunt and Detragiache (2002); Karas, Pyle, and Schoors (2013)). Under the current limited liability
environment, deposit insurance increases bank incentives to take on greater risk, making
the financial system more prone to crisis. Given the costs associated with financial crises,
designing a financial regulatory environment that discourages excessive risk-taking and
preserves market discipline is important.
Prior to the Great Depression, bank deposits were protected with extended shareholders’ liability. All federal charters, established under the National Banking Act of 1863,
imposed double liability. Many states imposed double or greater liability as a feature
of their bank charters. Under extended liability, when a bank is declared insolvent and
closed with negative net worth, shareholders are responsible for their initial investment
plus some or all of the unpaid debts in proportion to their shareholdings.1
Extended liability may lower depositor withdrawal risk for two reasons. First, extended liability affects deposit withdrawal risk because it affects banks’ choice of default
risk. Banks with greater shareholder liability may target a low level of default risk since
shareholders are called upon to cover (in proportion to their shareholdings) some or all of
the unpaid debts in the event of bank default. Second, extended liability affects deposit
withdrawal risk because it offers depositor protection, much like a deposit insurance system that creates artificial confidence in the banking system. Depositors would be less
likely to run on banks with a large amount of contingent capital since their deposits are
fully or partially covered by contingent capital (Dimsdale and Hotson, 2014).
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In addition, bank regulators required managers to hold bank shares, forcing managers to personally
bear the downside risk of their risk-taking as well. Federal law required all members of the board of
directors to own a minimum of $1,000 dollars in stock (at par value), and most state laws had similar
provisions (Mitchener and Richardson, 2013).

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In this paper, we analyze how extended liability affected deposit withdrawals during
the Panic of 1893. To do so, we construct a dataset on commercial banks in California
from 1890 to 1896.2 During this period, state and national banks in California operated
under different liability rules. National banks were subject to double liability, which
meant limited shareholders’ liability exposures. In contrast, state banks were subject to
unlimited liability, so shareholders could not pass along any losses to depositors. The
difference in liability rules would have provided incentives to target different levels of
default risk, and in turn, would have affected deposit withdrawal risk. In addition, the
differences in liability rules meant a different degree of off-balance sheet protection, which
in turn would have affected depositors’ withdrawal decisions.
We focus on the period around the Panic of 1893 because it was one of the most severe
panics during the National Banking Era of 1863-1913. It was one of five panics that called
for collective action by the members of the New York clearinghouse and one of three panics
that resulted in the suspension of convertibility. Moreover, this was the only panic that
originated in rural areas and eventually reached New York City. California was one of
the most severely affected states during this panic. As a result, many banks suspended
cash payments and a few of them failed. High failure risk during this panic provides
substantial observable cross-sectional variation. Further, the loss of general depositor
confidence during the panic should help us understand whether stricter extended liability
was effective in mitigating bank runs and bolstering depositors’ confidence in the banking
system.
We find that stricter liability rules reduced bank risk. First, state banks had safer asset
portfolios. State banks held safer asset portfolios as their loans were mostly collateralized.
In contrast, national banks held a larger portion of unsecured loans. Second, state banks
used less leverage and had higher capital buffers.3
In addition, we find that banks with stricter liability rules faced less deposit with2

Carlson and Mitchener (2009) also examine the stability of the banking system in California. They
study California banks during the Great Depression to understand the effects of the expansion of largescale, branch-banking networks on competition and bank survival.
3
Other studies find that banks with shareholder liability actually increased leverage (Macey and
Miller, 1992; Grossman, 2001; Bodenhorn, 2016).

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drawals. While both state and national banks experienced large deposit outflows, the
magnitude of deposit outflows at state banks was less than that of deposit outflows at national banks. These results are robust to controlling for areas with banks that suspended
cash payments and hold for banks in locations with and without suspended banks.
This paper makes contributions to several literatures. First, it adds to the literature on
extended liability and its effect on bank risk. While regulators wanted extended liability to
rein in bank risk-taking behavior, previous studies have shown mixed results. While some
studies show that banks operating with extended liability exhibited less risky behavior
than banks with single liability (Esty, 1998; Grossman, 2001; Mitchener and Richardson,
2013), others find that double liability encouraged bankers to take more risk (Macey and
Miller, 1992; Bodenhorn, 2016). We contribute to this literature by comparing banks
under different extended liability rules. While previous studies compare portfolio choices
of banks under double liability to those of banks under single liability, we compare the
choices of asset risk and capital by banks under unlimited liability to those of banks under
double liability.
Second, our paper adds to the literature investigating how financial safety nets affect
depositor discipline. While previous empirical studies have focused on examining the effect of deposit insurance on depositor discipline, we examine the effect of extended liability
on depositor discipline. Most studies find that deposit insurance increases moral hazard
and distorts market discipline, but a few studies find no such evidence. In particular,
from studying Latin American countries during the 1980s and 1990s, Martinez Peria and
Schmukler (2001) find that deposit insurance does not decrease market discipline. They
argue that deposit insurance may not have been effective because depositors became more
vigilant about bank solvency in the mist of banking crises and doubted the credibility of
deposit insurance schemes. In addition, several empirical studies have been conducted to
examine how deposit insurance affected the banking sector in a historical setting (Wheelock, 1992; Alston, Grove, and Wheelock, 1994; Wheelock and Wilson, 1995; Calomiris
and Jaremski, 2016). In particular, Calomiris and Jaremski (2016) study banks in U.S.
states that adopted deposit insurance during the period before government-sponsored

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deposit insurance was adopted and find insured banks were able to attract deposits more
easily even though they increased their insolvency risk. We contribute to this literature
by comparing the behavior of depositors of state banks to those of national banks during
the panic. Much like deposit insurance, extended liability also provides depositors with
reduced incentives to monitor their banks since it requires shareholders to partially or
fully stand behind bank debt.
Lastly, this study contributes to the literature on the Panic of 1893. Previous studies
focus on the causes of the panic. Carlson (2005) finds that real economic shocks explained
regional patterns, but insolvency and illiquidity of banks actually triggered bank runs at
the local level. Dupont (2007) further investigates this issue and finds that regional
patterns of bank failures can be explained by negative agricultural shocks. In a separate
study, Dupont (2009) finds that bank runs were not bank-specific and were caused by the
loss of confidence in the banking system. Other studies investigate how financial contagion
spread during the panic. Ramirez and Zandbergen (2014) examine a vertical contagion
triggered by the strategic behavior of depositors that is not related to bank fundamentals.
In contrast, Calomiris and Carlson (2016) examine a horizontal contagion triggered by the
suspension of convertibility in New York. In this paper, we do not examine why failures
occurred. Instead, we focus on understanding how liability requirements contributed to
variation in bank risk and deposit outflows during the panic.
Our study has several important implications for current regulatory reforms. First, it
is important to create a resilient financial system where runs are possible. In particular,
in markets where short-term debts are not insured, short-term debt holders will run on
their institutions if they take too much risk as seen with repos, asset-backed commercial
paper, and money market funds during the financial crisis. Second, given that some
form of deposit protection (implicit or explicit deposit insurance) tends to reduce market
discipline and encourage banks to engage in excess risk-taking, the expansion of deposit
insurance should be accompanied with strengthened bank regulation to ensure financial
stability. To conclude, our study suggests that it is important to align incentives of banks
and depositors. In other words, it is important to create a system that encourages bankers

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to engage in prudent lending practices and preserves market discipline.
The remainder of the paper is organized as follows. Section 2 presents the relevant
historical background. Section 3 introduces the data and provides summary statistics.
Section 4 and 5 describe the empirical methodology and results. Section 6 concludes.

2

Historical Background

2.1

Extended Liability

Until the passage of the Banking Act of 1933, American banks were often organized as
extended liability corporations. Under extended liability, shareholders are required to
repay unpaid debts out of their personal wealth in proportion to their shareholdings.
During the free banking era, some states imposed extended liability on banks, while
others allowed a bank to choose its own level of shareholder liability (Grossman, 2001).
More than half of U.S. had free banking laws by 1860, . Extended liability became more
common after the passage of the National Banking Act of 1863 required all federally
chartered banks to organize under double liability. Many states also imposed double
liability on bank shareholders. Overall, the number of states requiring double liability
rose from fewer than 10 states in 1851, to the federal government plus 18 states in 1875,
to federal plus 34 states in 1930 (Grossman, 2001). Some states imposed even more
stringent laws. For example, Colorado imposed triple liability on shareholders whereas
California adopted a system of unlimited liability (Vincens, 1957).
Extended liability was adopted to foster a more conservative banking system. Since
extended liability imposes post-closure losses on bank stockholders, it would increase
incentives for banks to hold capital and decrease moral hazard incentives, such as a “go
for broke” strategy. In addition, under extended liability, banks in financial difficulty
would be more likely to close before their liabilities exceeded their assets to prevent
shareholders from being assessed the extra liability. By doing so, banks would allow
depositors to avoid potential losses. Early closures in the form of voluntary liquidations
minimized depositor and shareholder losses.
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In the absence of deposit insurance, extended liability was used as solvency assurance
to depositors. By standing more fully behind its debts, a bank reduced deposit risk
and attracted depositors at lower interest rates. This means that depositors who chose
limited liability banks chose to expose themselves to a higher degree of insolvency risk, in
exchange for the comparative benefits limited liability banks offered them (White, 1995).
Several empirical studies examine how extended liability affects bank risk-taking.
Some studies support the finding that extended liability reduces a bank’s risk-taking.
Based on cross-sectional studies, Grossman (2001) and Mitchener and Richardson (2013)
find that banks operating in multiple-liability states held more capital and liquid assets.
Esty (1998) finds that banks in states with stricter liability rules had balance sheets
with lower equity and asset volatilities. The findings of these studies have implications
for depositor withdrawal behavior. Bank depositors are risk averse, hence they may
withdraw long before a bank becomes insolvent if the bank takes on too much risk.
In other words, a bank with safe banking practices would have a lower probability of
depositor withdrawal (Martinez Peria and Schmukler, 2001; Karas, Pyle, and Schoors,
2013).
In contrast, other studies document that extended liability actually increased bank
risk. Macey and Miller (1992) show that banks with double liability appear to have been
able to operate with lower capital ratios than banks without double liability. Similarly,
Bodenhorn (2016) finds that banks increased their leverage after they adopted double
liability rules. These studies argue that extended liability allowed banks to engage in risktaking activities because it offered off-balance sheet protection for bank depositors and
reduced their incentives to monitor banks. In other words, much like deposit insurance,
extended liability might provide an incentive for depositors to ignore risk and thereby
distort market discipline. These findings imply that a banking system under a stricter
liability regime would have lower deposit withdrawal risk than a banking system with a
more lenient liability regime when there is no deposit insurance.4
4

Several studies have shown implicit deposit guarantees reduce market discipline and encourages
bank risk-taking (see, for example, Penati and Protopapadakis (1988) and Demirg¨
u¸c-Kunt and Huizinga
(2004)).

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While several studies have examined the effect of extended liability on bank risktaking, the effect of extended liability on deposit withdrawal risk has not previously been
directly examined. To our knowledge, this paper is the first to study how the differences
in liability rules affected a bank’s choices of assets and leverage, in addition to depositor
withdrawals during a banking crisis when the risk tolerance of bank depositors would
have been lower than normal.

2.2

The Panic of 1893

The Panic of 1893 was one of the most severe panics during the National Banking Era
that required collective action by the members of the New York Clearinghouse. During
the panic, member banks suppressed bank-specific information, issued clearinghouse loan
certificates, and suspended cash payments. Unlike other panics during the National
Banking Era, the Panic of 1893 started from the interior and then radiated to New York
City and accompanied a large number of bank failures.
While the immediate cause of the panic is still debated, two events preceded the panic.
Some contemporary scholars claim that the crisis originated from a fear of depreciation
and an attack on the exchange rate (Lauck, 1907; Noyes, 1909). The falling gold reserves
of the U.S. Treasury raised concerns at home and abroad about the government’s ability
to maintain gold parity, so investors wanted to convert their bank deposits into gold,
generating an attack on the currency. Other contemporary and most modern scholars
maintain that concern over gold parity had little effect (Friedman and Schwartz, 2008;
Sprague, 1910; Wicker, 2006) and put more emphasis on the slowdown in economic activity. They argue that concerns over the problems in the real sector, such as a slowdown
in railroad investment, the failure of a few large railroad companies, and the declining
stock market, precipitated the failure of a few large banks and triggered a systemwide
run in June 1893.
The panic began in May and ended in August after 503 banks suspended operations.
The peak occurred in June and July when 340 banks banks suspended operations. In
June, bank runs swept through midwestern and western cities such as Chicago and Los
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Angeles. In the second week of July, bank suspensions intensified, with the highest
concentration of suspensions and liabilities of suspended banks in the western states. As
these banks came under pressure, they withdrew funds that they kept on deposit in New
York City banks. In order to overcome liquidity shortages, the New York Clearinghouse
issued clearinghouse loan certificates in June and implemented the partial suspension of
cash payments in August. The suspension of cash payments created a currency premium
in New York and other cities.
California was one of the most severely affected states during the Panic of 1893. Bank
runs began with the failure of the Riverside Banking Company on June 14. Following
that failure, bank runs spread quickly to nearby cities and engulfed San Francisco, San
Bernardino, Los Angeles, and San Diego (see Table A1 in the appendix).
Table 1 provides information on the number of suspended banks during the Panic
of 1893, both in the US and in California. In California, several national, state, and
savings banks suspended payments and resulted in several permanent bank failures. At
the beginning of the third week of June, a total of 27 banks shut their doors throughout
the state. While most of them reopened by the third week of July, five of them closed
permanently. Of the six national banks that suspended payments, five resumed and
one failed. Throughout California, 17 state banks closed temporarily and two failed.
Finally, two California savings banks also failed. While the number of suspensions in
California accounted for a small fraction of the total number of suspensions in the United
States, California alone accounted for one-third of the total liabilities of failed banks in
the country. In this paper, we will examine how differences in bank liability structures
affected deposit outflows at state and national banks when the default risk of these banks
was at its highest.

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Table 1: Number of Failed Banks in the United States during the Panic of 1893
This table shows the number of failed banks in the United States and the state of California due to the
Panic of 1893 as of December 31, 1893.
National

Suspensions
Resumptions
Failures

State

Savings

Private Banks

US

CA

US

CA

US

CA

US

158
86
71

6
5
1

172
49
123

19
17
2

47
10
37

2
0
2

198
0
198

CA
0
0
0

Total
US

CA

575
145
430

27
22
5

Grand Total

602
167
435

Source: Biennial Report of the Attorney-General of the State of California (1893-1894).

3

Data and Summary Statistics

3.1

Data Sources

We collect data from the Report of the Board of Bank Commissioners of the State of
California (1890-1896). The state banking department collected information on state
banks and published this information in January and July of each year. The report
provides detailed balance sheet information on state banks. The report also provides the
same information on national banks for July of each year. The structure of state and
national banks in California provides a unique dataset of banks under different liability
rules. We construct our dataset from July 1890 to 1896 and compare the behavior of state
banks and national banks. Our micro-sample consists of data on 246 banks in California,
204 of which are state banks and 42 are national banks.
The report provides several advantages. Although state and national banks were
regulated under different authorities, the report provides standardized asset and liability
categories for both types of banks. This makes it easier for us to compare the asset
risk and capital for these banks. Second, the reports provide names of directors and the
corresponding number of outstanding shares. This information allows us to access a bank
manager’s liability exposure, which can affect a bank’s risk-taking incentives. Lastly, by
taking balance sheets reported in July, we capture bank conditions immediately following
the panic, which affected California banks from mid-June to early-July.

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3.2

Balance Sheet Trends and Summary Statistics

To determine how liability rules affected balance sheet ratios, insider ownership, and
deposit runs, we begin with an analysis of balance sheet holdings of state and national
banks. Table 2 provides information on asset and liability categories. Our analysis
examines trends in liquid assets and loans on the asset side of the balance sheets, and
equity and deposits on the liability side of balance sheets.
Table 2: Assets and Liabilities Reported, California State and National Banks, 1890-1896.
This table shows the bank balance sheet items available in our dataset. The data fields are categorized
into assets and liabilities.

Assets

Liabilities

Bank Premises
Other Real Estate
Invested in Stocks Bonds, and Warrants
Loans on Real Estate
Loans on Stocks, Bonds, and Warrants
Loans on Other Securities
Loans on Personal Security
Money on Hand
Due from Banks and Bankers
Other Assets

Capital Paid Up
Reserve and Profit and Loss
Due Depositors
Due to Banks and Bankers
Public Funds
Other Liabilities

Source: Report of the Board of Bank Commissioners of the State of California (1890-1896).

Figure 1 presents the movements of liquidity ratios from 1890 to 1896. During this
period, the report provides two types of liquid assets: ‘money on hand,’ and ‘due from
banks and bankers.’ While both types of assets were considered legal reserves, banks
preferred ‘due from banks and bankers,’ which returned 2% interest payments. Bank
regulators encouraged banks to hold cash assets and restricted the amount of interbank
deposits banks could hold because interbank deposits could pose a threat to bank liquidity
under adverse economic conditions. Rural banks having liquidity problems may withdraw
from city bank correspondents and overwhelm the ability of city bank correspondents to
pay. Subsequently, large withdrawals by rural banks could lead to a liquidity crisis of
city banks and a suspension of deposit convertibility in major cities. Conversely, rural
banks that rely on being able to access interbank deposits due from city banks might
suddenly become illiquid and fail to meet deposit withdrawals when city correspondent

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banks decide to suspend payments.
Panel A of Figure 1 plots the ratio of liquid assets against total assets. It shows that
state banks held less liquid assets than national banks. From Panels B and C of Figure 1,
we examine the composition of liquid assets for these two types of banks. They show
that state banks held less cash assets and interbank deposits than national banks.
Given that asset portfolios of banks during this period mostly comprised liquid assets
and loans, we examine the behavior of loan portfolios. The state bank commissioners
report provides information on four categories indicating loans: loans on real estate,
loans on stocks bonds and warrants, loans on other securities, and loans on personal
security. The first three categories were secured loans, whereas the last category was
unsecured loans. The distinction between the two allows us to access the riskiness of loan
portfolios.
In Figure 2, we plot the ratio of loans against total assets for our sample period.
Panel A shows that state banks held more loans than national banks. However, Panel B
through D show that state bank held more collateralized loans while national bank held
more unsecured loans. While the high level of the loan-asset ratio gives the impression
that state banks were riskier, the composition of loans indicates state banks had safer
loan portfolios than national banks, which enabled them to hold less cash.
Next, we examine equity ratios from 1890 to 1896. During this period, it was important to divide equity capital into par and surplus accounts. Par capital (also referred
to as ‘legal capital’) is the minimum amount of capital that stockholders were required
to maintain as on-balance-sheet equity. Surplus capital is the sum of additional paid-in
capital and undistributed profits that have not been allocated to the par account. The
distinction between the two types of capital was important because shareholders of banks
under extended liability rules were assessed based on the par value of their stock.5
Figure 3 plots the ratio of equity capital over total liabilities for both state and
national banks. It shows that state banks took on less leverage than national banks. In
addition, state banks held a much higher level of paid-in capital (which gave shareholders
5

Extended liability means that the receiver could personally assess each stockholder for an amount
up to its pro rata share of the bank’s par capital to cover a liquidating bank’s unpaid debts.

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0.22

NATIONAL
STATE

0.20

0.18
0.16

0.14

Mean CashToAssets

1890

1891

1892

1893

1894

1895

1896

Year

(a) Liquid assets to total assets

NATIONAL
STATE


NATIONAL
STATE


0.10
0.09

0.08


Mean DueFromBanksToAssets

0.06

0.11

0.10


0.04

0.08

Mean MoneyToAssets

0.12

1890

1891

1892

1893

1894

1895

1896

1891

1892

Year

1893

1894

1895

Year

(b) Cash to total assets

(c) Interbank desposits to total assets

Figure 1: Liquidity to total assets.

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1896

NATIONAL
STATE

0.20

Mean SafeAssetsEToAssets

0.25

0.30

NATIONAL
STATE

0.15

0.70
0.65

0.60

Mean LoansToAssets

0.35

0.75

0.55

0.10

1890

1891

1892

1893

1894

1895

1896

1891

1892

1893

Year

1894

1895

1896

Year

(b) Collateralized loans to total assets


0.85

(a) Loans to total assets

NATIONAL
STATE

NATIONAL

STATE

0.80

0.50

0.40

0.75
0.70
0.65

Mean UnsecuredToTotalLoans

0.60

0.45

0.55

0.50

0.35

Mean UnsecuredToAssets

1891

1892

1893

1894

1895

1896

1891

1892

Year

1893

1894

1895

Year

(c) Unsecured loans to total assets

(d) Unsecured loans to total loans

Figure 2: Loans to total assets.

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1896

a contingent liability on the unpaid portion of the share) than national banks. Since state
banks offered a larger degree of off-balance sheet protection through unlimited liability
requirements, state banks were safer than national banks based on the examination of
both an explicit on-balance sheet capital account and an off-balance sheet guarantee.
Lastly, we assess the concentration of insider ownership among Californian banks.
Managers who hold bank shares personally bear the downside risk of their risk-taking,
so banks with high levels of insider ownership should be safer than those with low levels.
Also, high insider ownership should provide greater security to depositors because it
eases the cost of assessing shareholder guarantees. Figure 4 shows information on insider
ownership. It plots the mean value of the outstanding stocks held by all directors in
banks of the two types. This figure indicates that directors of state banks held more
than those of national banks These findings suggest that state bank insiders had greater
incentives to engage in sound banking than national banks.
Taken together, we find that state banks were safer than national banks in California.
While state banks held less cash than national banks, they had safer loan portfolios and
took on less leverage. In other words, safer asset portfolios, combined with a higher level of
on-balance sheet paid in capital and off-balance sheet protection, may have allowed state
banks to operate with less capital than national banks because they faced lower deposit
risk. State banks’ sound banking activities are partially explained by high degrees of
insider ownership which provided managers incentives to constrain risk-taking.
Next, we examine the behavior of deposits. During this period, banks used riskintolerant deposits as a major source of funding (Calomiris and Wilson, 2004). In general,
bank runs originated from depositors’ desire to withdraw from suspect banks with increasing insolvency risk. However, bank runs can spread from insolvent banks to solvent banks.
This is because demand deposits have a sequential servicing constraint, which creates a
greater expected payoff to arriving sooner rather than later to withdraw one’s deposit. In
other words, a redemption is optimal because the deposit is unconditionally redeemable
on demand. The bank pays on a first-come-first-served basis and default is most likely on
last claim serviced. One of the ways to prevent a run is to implement deposit insurance.

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NATIONAL
STATE

0.45

Mean Leverage

0.50

0.40

1891

1892

1890

1893

1894

1895

1896

Year

(a) Equity capital to total liabilities

NATIONAL
STATE

0.30

0.25

Mean CapitalToLiabilities

0.35

1890

1891

1892

1893

1894

1895

Year

(b) Paid-in capital to total liabilities

Figure 3: Equity to total liabilities.
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1896

0.50

NATIONAL
STATE

0.46
0.44
0.42

0.40

Mean BoardOwnedFraction

0.48

0.38


1890

1891

1892

1893

1894

1895

1896

Year

Figure 4: Insider Ownership.
This figure plots the average fraction of the total shares of a bank held by the board of directors.

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Because California state banks maintained lower asset risk and high capital buffers than
national banks, it is possible that that state banks were more insulated from runs.
Figure 5 plots the deposit index, created by dividing the total amounts of loans in
each year by the total amount of loans in 1890. It shows that deposit outflows occurred
at both state and national banks. During the Panic of 1893, the fall in deposits is steeper
for national banks than state banks, providing some evidence that state banks were
insulated from the withdrawals of deposits.6 In the next section, we further examine how
depositors at state and national banks reacted to bank fundamentals during the panic
and post-panic period. Table 3 presents the summary statistics for the key data fields

1.25

used in the empirical analysis.

NATIONAL
STATE

1.15


1.10

Deposits Index

1.20

1.00

1.05

1890

1891

1892

1893

1894

1895

1896

Year

Figure 5: The deposits index.
This figure plots the deposit index, defined as the total amount of loans in each year divided by the total
amount of loans in 1890.

6

The magnitude should be smaller for state banks if runs were bank-specific and linked to bank
fundamentals because depositors would be less likely to run on state banks and would redeposit into
state banks the funds they withdrew from national banks.

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Table 3: Summary statistics
This table shows summary statistics of the key balance sheet fields and growth rates used in the empirical
analysis for California state banks and national banks from 1890 to 1896.
State Banks

Total assets
Due to depositors growth rate
Money on hand growth rate
Due from banks and bankers growth rate
Total loans growth rate
Equity to Liabilities
Cash to Assets
Unsecured to total loans

4

National Banks

Mean

Median

Std Dev

Mean

Median

Std Dev

982,677
-0.317
-2.754
3.686
-0.049
0.479
0.082
0.556

325,935
-0.129
-1.839
0.639
-0.523
0.471
0.067
0.566

2,126,546
25.166
47.138
135.399
19.716
0.145
0.055
0.220

940,578
1.686
1.159
-0.030
0.209
0.383
0.104
0.775

592,122
0.587
4.146
5.267
-0.571
0.369
0.091
0.845

1,122,129
23.075
45.985
91.792
14.898
0.099
0.050
0.259

Empirical Methodology

We employ difference-in-difference estimators to identify the causal effect of extended
liability on depositors’ behavior. The supervisory environment in California at the time
allows us to define a treatment and a control group: state banks that were subject to
unlimited liability and national banks that were subject to double liability. We estimate
the effect of differences in liability regimes on depositor behavior during the panic through
the following models:

∆ln(Di,t ) =α + β1 ST AT Ei + β2 P AN ICt
+ β3 P AN ICt ∗ ST AT Ei + γXi,t−1 + Z + εi,t

(1)

∆ln(Di,t ) =α + β1 ST AT Ei + β2 P OST P AN ICt
+ β3 P OST P AN ICt ∗ ST AT Ei + γXi,t−1 + Z + εi,t

(2)

where the dependent variable is the growth rate of deposits for bank i located at time
period t. The dummy variable, ST AT E, takes on the value of one if the observation is
for member banks. The other dummy variable, P AN ICt , takes on the value of one if the
observation is the year of the panic. Similarly, the dummy variable, P OST P AN ICt ,
takes on the value of one if the observation is after the year of the panic. Xi,t−1 represents
a vector of bank-level controls that varies over time and across banks. These include the
ratio of equity to liabilities, cash to asset ratio, loan quality, and log of asset size. In
19

some specifications, the vector of controls Z includes time and bank-level fixed effects.
Time fixed effects control for any aggregate shocks which could have affected deposit
movements and bank fixed effects control for time-invariant influences. Standard errors
of these panel regressions are clustered by time (Thompson, 2011).
The coefficient β3 represents the difference-in-difference estimate measuring whether
depositors of state banks behaved differently during the panic and post-panic periods.
If the unlimited liability feature offered by state banks effectively boosted depositors’
confidence during the panic, this coefficient should be positive and significant.
A natural question with respect to our empirical approach is whether board members’
liability exposures affected depositor behavior since the managers who are more exposed
to potential losses have varying incentive to take on risk. In other words, the degree of
managers’ liability exposures could have affected depositors’ confidence about the quality
of their banks. The following regression captures how bank board members’ liability
exposures affected depositors’ behavior:

∆ln(Di,t ) =α + β1 ST AT Ei + β2 P AN ICt + β3 HIGH EXP OSU REi,t
+ β4 P AN ICt ∗ ST AT Ei + β5 ST AT Ei ∗ HIGH EXP OSU REi,t
+ β6 P AN ICt ∗ HIGH EXP OSU REi,t
+ β7 P AN ICt ∗ ST AT Ei ∗ HIGH EXP OSU REi,t
+ γXi,t−1 + Z + εi,t

(3)

∆ln(Di,t ) =α + β1 ST AT Ei + β2 P OST P AN ICt + β3 HIGH EXP OSU REi,t
+ β4 P OST P AN ICt ∗ ST AT Ei + β5 ST AT Ei ∗ HIGH EXP OSU REi,t
+ β6 P OST P AN ICt ∗ HIGH EXP OSU REi,t
+ β7 P OST P AN ICt ∗ ST AT Ei ∗ HIGH EXP OSU REi,t
+ γXi,t−1 + Z + εi,t

(4)

The dummy variable, HIGH EXP OSU REi,t , takes on the value of one if bank i is in
the top tercile (third) by fraction of bank equity owned by the board of directors in year

20

t.The coefficient β7 represents the difference-in-difference estimate capturing the effect on
depositors’ behavior from differences in bank board members’ liability exposures during
the panic and post-panic periods. If the magnitude of deposit runs at state banks whose
board members had high exposure was smaller than other banks, we would expect β7 to
be positive and significant.
Using similar regression specifications to Eqns (3) and (4), we also examine the effect
on depositor behavior in banks that were located in areas with temporary and/or permanent bank suspensions during the panic and any variation in banks that are located
in major financial centers (i.e., San Francisco and Los Angeles).

5

Results

In Table 4, we report the difference-in-difference estimation from Eqns (1) and (2). Regressions 2 through 5 and 7 through 10 include lagged standardized controls for bank
characteristics: the ratio of equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset
ratio (zCashT oAssetsi,t−1 ), loan quality (zU nsecuredT oT otalLoansi,t−1 ), and log of asset size (zLogT otalAssetsi,t−1 ). Regressions 3 and 8 include time fixed effects; regressions
4 and 9 include bank fixed effects; regressions 5 and 10 include both time and bank fixed
effects. In all panel regression results presented this section, growth rates are in percentage, dependent variables are winsorized at the 1% level to mitigate the influence of any
outliers,7 and t-statistics clustered by year are shown below each coefficient estimate in
the tables.
In columns 1, 2, and 4 of Table 4, the coefficient on P AN ICi shows the deposits
growth of national banks during the panic, and its interaction with ST AT Ei (the coefficient on P AN ICt ∗ ST AT Ei ) shows the difference during the panic in the deposits
growth of state banks, which are subject to unlimited liability. Similarly, the coefficient
on P OST P AN ICt ∗ST AT Ei shows the difference after the panic in the deposits growth
of state banks. Regressions 6 through 10 exclude the panic year (1893) to clearly show the
difference between the pre- and post-crisis years. The coefficient on P AN ICi is negative
7

The winsorization does not qualitatively affect the regression results or change the main conclusions.

21

and significant at the 1% level, indicating that there was significant negative deposits
growth at national banks during the panic. The coefficient varies from -15.355% to 19.441%, depending on the controls included. The coefficient on P AN ICt ∗ ST AT Ei in
regressions 1 through 5 shows that state banks experienced less deposit outflows during
the panic: the coefficient on the interaction term is positive and significant at the 1%
level, ranging from 8.847% to 10.253% depending on the controls included. In contrast,
the coefficient on P OST P AN ICt is not significant, indicating no difference in deposits
growth rates between the pre- and post-crisis periods. There is also no significant difference in how national and state banks faired during the post-panic period. This indicates
that national banks did not recover deposits lost relative to state banks within the three
years following the panic.
With regard to our main variable of interest, the interaction term P AN ICt ∗ST AT Ei ,
we find the coefficient to be statistically significant under all specifications. The interaction term P OST P AN ICt ∗ ST AT Ei , is statistically not significant under all specifications. These results suggest the deposit movements in state banks differ from those
of national banks during the Panic of 1893. Deposit growth rates are not significantly
different between state and national banks afterwards.
Next, we investigate whether the deposit movements in state banks whose board
members had high liability exposures differed from other banks during the panic and
post-panic periods using the specifications in Eqns (3) and (4). In Table 5, we report the
results. The dummy variable, HIGH EXP OSU REi,t , takes on the value of one if bank
i is in the top tercile by fraction of bank equity owned by the board of directors in year
t. The interaction terms P AN ICt ∗ ST AT Ei ∗ HIGH EXP OSU REi,t is insignificant in
every regression and P OST P AN ICt ∗ST AT Ei ∗HIGH EXP OSU REi,t is insignificant
after controlling for other bank characteristics. Taken together, the deposit movements in
state banks whose board members had high liability exposures did not differ from other
banks during the panic and post-panic periods. These results indicate that the high
degree of off-balance sheet guarantee was sufficient enough to boost depositor confidence
regardless of the distribution of bank stock ownership.

22

Table 4: Baseline regression results
This table shows results from panel regressions of annual deposit growth rates as the dependent variable for state and national banks in the state of California from 1890 to 1896. ST AT Ei is one if the
observation is for a state bank, and zero otherwise. P AN ICt is one if the observation is in 1893, and
zero otherwise. P OST P AN ICt is one if the observation is after 1893, and zero otherwise. Where included, bank characteristic controls are standardized and lagged one year. These controls are the ratio of
equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset ratio (zCashT oAssetsi,t−1 ), loan quality
(zU nsecuredT oT otalLoansi,t−1 ), and log of asset size (zLogT otalAssetsi,t−1 ). Regressions (6) through
(10) exclude the panic year (1893). Growth rates are in percentage. t-statistics clustered by year are
shown below each coefficient estimate.
(1)

(2)
∗∗

(3)

(8)

(9)

-2.968
-0.754

-3.609
-0.891

P OST P AN ICt ∗ ST AT Ei

-1.189
-0.348

-1.477
-0.383

-1.656
-0.432

0.982
0.189

1.092
0.211

-3.574∗∗
-2.037

-3.552∗∗
-2.033

-64.197∗∗∗
-4.221

-65.700∗∗∗
-4.159

P AN ICt ∗ ST AT Ei

-19.441∗∗∗ -18.524∗∗∗
-9.458
-7.608
10.253∗∗∗
5.561

zLogT otalAssetsi,t−1

zEquityT oLiabilitiesi,t−1

zCashT oAssetsi,t−1

zU nsecuredT oT otalLoansi,t−1

Time FE
Bank FE
Observations
Adjusted R2

No
No
783
0.029

10.141∗∗∗
4.800

96.740
6.540
10.103
3.608
1.979
3.552

∗∗∗

(10)

P OST P AN ICt

P AN ICt

-7.026∗∗∗
-3.255

99.295
3.914

∗∗∗

(7)

-6.781∗∗∗
-3.706

-3.694∗∗
-2.003

7.588
12.266
3.144
7.023

∗∗∗

(6)

-2.786
-1.390

ST AT Ei

-7.093∗∗∗
-3.401

(5)

∗∗∗

4.972
2.419

∗∗∗

(4)

∗∗

Constant

∗∗∗

∗∗∗

12.156
108.382
8.836
3.718

110.154∗∗∗
3.625

-6.799∗∗∗
-3.629

-15.355∗∗∗
-6.112
9.836∗∗∗
4.936

9.066∗∗∗
3.583

8.847∗∗∗
3.671

-3.144∗∗
-2.077

-3.150∗∗
-2.094

3.220∗∗
2.576

3.415∗∗∗
2.733

7.946∗∗∗
3.040

9.448∗∗∗
4.270

4.312∗∗∗
4.302

4.311∗∗∗
4.213

8.497∗∗∗
2.930

8.816∗∗∗
2.937

1.074
0.625

1.176
0.671

-1.021
-0.452

-0.655
-0.283

1.769
0.992

1.741
0.957

-2.097
-1.065

-2.046
-0.924

-0.522
-1.012

-0.661
-1.326

-0.525
-0.311

-0.722
-0.433

-0.750∗
-1.666

-0.845
-1.582

-0.875
-0.457

-1.094
-0.508

No
No
655
0.041

Yes
No
655
0.042

No
No
783
0.051

Yes
No
783
0.058

-68.958∗∗∗ -65.711∗∗∗
-5.976
-4.965

-4.764
-1.233

No
Yes
783
0.178

Yes
Yes
783
0.187

No
No
655
0.005

23

p<0.1;

No
Yes
655
0.194
∗∗

p<0.05;

Yes
Yes
655
0.199
∗∗∗

p<0.01

Table 5: Regression results controlling for board of directors exposure
This table shows results from panel regressions of annual deposit growth rates as the dependent variable
for state and national banks in the state of California from 1890 to 1896. ST AT Ei is one if the observation
is for a state bank, and zero otherwise. P AN ICt is one if the observation is in 1893, and zero otherwise.
P OST P AN ICt is one if the observation is after 1893, and zero otherwise. HIGH EXP OSU REi,t is
one if bank i is in the top tercile by fraction of bank equity owned by the board of directors in year t.
Where included, bank characteristic controls are standardized and lagged one year. These controls are
the ratio of equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset ratio (zCashT oAssetsi,t−1 ),
loan quality (zU nsecuredT oT otalLoansi,t−1 ), and log of asset size (zLogT otalAssetsi,t−1 ). Regressions
(4) through (6) exclude the panic year (1893). Growth rates are in percentage. t-statistics clustered by
year are shown below each coefficient estimate.
(1)

(2)

(3)

(5)

(6)

5.612∗
1.914

9.784∗∗∗
3.846

110.116∗∗∗
3.538

5.236∗∗∗
2.773

7.935∗∗∗
3.812

ST AT Ei

-3.676
-1.342

-6.885∗∗∗
-2.659

-1.242
-0.463

-5.727∗∗
-2.556

HIGH EXP OSU REi,t

-1.354
-0.390

-1.512
-0.473

4.141∗∗∗
2.633

1.632
0.914

0.249
0.052

-0.726
-0.149

-6.505∗∗∗
-2.648

-4.543
-1.619

-19.340∗∗∗
-10.241

-18.531∗∗∗
-7.946

8.813∗∗∗
3.217

8.788∗∗∗
2.994

7.128∗∗∗
2.710

-1.568
-0.452

-0.656
-0.228

-1.861
-0.232

6.462
1.349

5.757
1.373

7.049
0.881

P OST P AN ICt

-0.689
-0.178

-2.087
-0.480

P OST P AN ICt ∗ ST AT Ei

-4.006
-0.824

-3.308
-0.585

-0.441
-0.065

-12.121∗∗∗
-3.997

-8.159∗∗
-1.987

-12.512
-1.451

14.178∗∗
2.116

9.303
1.122

9.893
0.875

Constant

ST AT Ei ∗ HIGH EXP OSU REi,t

P AN ICt

P AN ICt ∗ ST AT Ei

P AN ICt ∗ HIGH EXP OSU REi,t

P AN ICt ∗ ST AT Ei ∗ HIGH EXP OSU REi,t

96.795∗∗∗
3.600

(4)

1.247
0.183

P OST P AN ICt ∗ HIGH EXP OSU REi,t

P OST P AN ICt ∗ ST AT Ei ∗ HIGH EXP OSU REi,t

Bank Characteristics Controls
Time FE
Bank FE
Observations
Adjusted R2

No
No
No
783
0.025

Yes
No
No
783
0.048

Yes
Yes
Yes
783
0.185

No
No
No
655
0.001

Yes
No
No
655
0.037

1.375
0.226

Yes
Yes
Yes
655
0.197

∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01

24

These results provide strong evidence that the depositors of state banks behaved
differently from those of national banks during the panic period. The depositor behavior
of state banks is statistically different from that of national banks, which suggests that
more stringent liability rules were able to insulate state banks from runs. In other words,
extended liability structures contributed to financial stability by increasing depositor
confidence in the banking system.
To mitigate concerns that these results are driven by few banks that experienced
a run or suspended during the panic, we test additional specifications. As reported in
White (1995), in the U.S. banking system, runs generally did not spread from insolvent to
solvent banks in general with the exception of during the Great Depression. In addition,
depositors withdrawing from suspect banks generally redeposited their money in solvent
banks. First, we remove banks that suspended during the panic period and rerun the
difference-in-difference estimation from Eqns (1) and (2). Second, we interact for locations
where at least one bank suspended, allowing us to estimate the difference-in-difference,
in a specification similar to Eqns (3) and (4), with HIGH EXP OSU REi,t replaced with
F ailedBankLocationi . F ailedBankLocationi is one if the observation is for a bank in
a location with at least one bank that suspended during the panic, and zero otherwise.
Tables 6 and 7 present these results.
The results in Table 6 are qualitatively similar to those in Table 4, showing that our
main result is robust to the exclusion of banks that suspended during the panic. Similarly,
in Table 7, the coefficient on the interaction term, P AN ICt ∗ ST AT Ei , is positive under
all specifications and statistically significant at the 1% level, ranging from 13.330% to
15.571% depending on the controls included. P AN ICt ∗ST AT Ei ∗F ailedBankLocationi
is negative and significant, ranging from -18.884% to -20.162% depending on the controls
included. This indicates that in locations where a bank failed during the panic, state
banks suffered worse depositor withdrawals than national banks. Greater exposure to
these localized contagious runs hints that state banks were at risk of a higher loss of
depositor confidence once a local bank suspended operations.
Next, we compare the depositor behavior of banks located in financial centers and

25

Table 6: Regression results excluding suspended banks
This table shows results from panel regressions of annual deposit growth rates as the dependent variable for state and national banks in the state of California from 1890 to 1896. ST AT Ei is one if the
observation is for a state bank, and zero otherwise. P AN ICt is one if the observation is in 1893, and
zero otherwise. P OST P AN ICt is one if the observation is after 1893, and zero otherwise. Where included, bank characteristic controls are standardized and lagged one year. These controls are the ratio of
equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset ratio (zCashT oAssetsi,t−1 ), loan quality
(zU nsecuredT oT otalLoansi,t−1 ), and log of asset size (zLogT otalAssetsi,t−1 ). Regressions (4) through
(6) exclude the panic year (1893). Growth rates are in percentage. t-statistics clustered by year are
shown below each coefficient estimate.

(1)

(2)

Constant

5.457∗∗∗
2.672

7.904∗∗∗
3.280

ST AT Ei

-4.311∗∗∗
-3.374

-7.635∗∗∗
-4.740

P AN ICt

-19.891∗∗∗
-9.738

-19.087∗∗∗
-8.922

10.834∗∗∗
8.478

10.825∗∗∗
7.908

P AN ICt ∗ ST AT Ei

(3)

(4)

(5)

(6)

98.127∗∗∗
3.796

8.450∗∗∗
3.429

11.553∗∗∗
5.890

109.831∗∗∗
3.799

-4.783∗∗∗
-3.186

-8.493∗∗∗
-7.109

-5.654∗
-1.934

-5.882∗∗
-2.138

1.487
0.689

0.914
0.421

9.242∗∗∗
4.575

P OST P AN ICt

P OST P AN ICt ∗ ST AT Ei

Bank Characteristics Controls
Time FE
Bank FE
Observations
Adjusted R2

No
No
No
720
0.028

Yes
No
No
720
0.047

Yes
Yes
Yes
720
0.184

No
No
No
601
0.007

Yes
No
No
601
0.039

2.915
0.715

Yes
Yes
Yes
601
0.199

∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01

26

Table 7: Regression results controlling for locations with suspended banks
This table shows results from panel regressions of annual deposit growth rates as the dependent variable
for state and national banks in the state of California from 1890 to 1896. ST AT Ei is one if the observation
is for a state bank, and zero otherwise. P AN ICt is one if the observation is in 1893, and zero otherwise.
P OST P AN ICt is one if the observation is after 1893, and zero otherwise. F ailedBankLocationi is
one if the observation is for a bank in a location with at least one bank that suspended during the
panic, and zero otherwise. Where included, bank characteristic controls are standardized and lagged
one year. These controls are the ratio of equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset ratio (zCashT oAssetsi,t−1 ), loan quality (zU nsecuredT oT otalLoansi,t−1 ), and log of asset size
(zLogT otalAssetsi,t−1 ). Regressions (4) through (6) exclude the panic year (1893). Growth rates are in
percentage. t-statistics clustered by year are shown below each coefficient estimate.
(1)
Constant

ST AT Ei

F ailedBankLocationi

ST AT Ei ∗ F ailedBankLocationi

P AN ICt

P AN ICt ∗ ST AT Ei

P AN ICt ∗ F ailedBankLocationi

P AN IC ∗ ST AT Ei ∗ F ailedBankLocationi

(2)

(3)

(4)

(5)

(6)

103.863∗∗∗
4.088

9.975∗∗∗
5.942

12.665∗∗∗
15.635

102.801∗∗∗
4.333

5.455∗∗
2.143

7.394∗∗∗
2.730

-4.726∗∗∗
-3.990

-8.501∗∗∗
-4.497

-5.115∗∗∗
-25.757

-9.533∗∗∗
-7.940

-1.416
-0.252

2.046
0.385

-10.483∗∗
-2.036

-6.138
-0.984

3.769
0.526

4.368
0.638

6.085
1.080

6.135
0.940

-21.885∗∗∗
-8.597

-20.773∗∗∗
-7.833

15.571∗∗∗
13.145

15.302∗∗∗
13.755

13.330∗∗∗
9.285

8.138
1.446

7.346
1.338

0.857
0.151

-20.162∗∗∗
-2.811

-19.890∗∗∗
-2.805

-18.884∗∗
-2.571
-8.716∗∗∗
-3.606

-9.095∗∗∗
-4.445

1.893
1.093

1.421
1.045

4.143∗∗
2.172

17.022∗∗
2.238

16.799∗
1.907

19.056∗∗
2.192

-5.556
-0.413

-4.643
-0.351

-2.907
-0.286

P OST P AN ICt

P OST P AN ICt ∗ ST AT Ei

P OST P AN ICt ∗ F ailedBankLocationi

P OST P AN IC ∗ ST AT Ei ∗ F ailedBankLocationi

Bank Characteristics Controls
Time FE
Bank FE
Observations
Adjusted R2

No
No
No
783
0.029

Yes
No
No
783
0.055

Yes
Yes
Yes
783
0.197

No
No
No
655
0.013

Yes
No
No
655
0.056

Yes
Yes
Yes
655
0.219

∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01

27

banks located outside financial centers. San Francisco and Los Angeles were reserve cities,
which mean that they received funds from both local depositors and institutional depositors at the time. In contrast, banks outside these two cities held funds from local depositors, most of which were farmers. One might question whether the difference in depositor
base affected depositors’ monitoring mechanisms and withdrawal behaviors. We investigate this within a specification similar to Eqns (3) and (4), with HIGH EXP OSU REi,t
replaced with LA SFi . LA SFi is one if the observation is for a bank located in the
financial centers of Los Angeles or San Francisco, and zero otherwise.
In Table 8, while regressions 1 through 3 have negative coefficients for P AN ICt ∗
ST AT Ei ∗ LA SFi , once you control for the effect of Los Angeles and San Francisco also
being locations with banks that suspended during the panic, this significance goes away.
Our results indicate that depositors of both state banks and national banks did not differ
from being located in a major financial center. In other words, both depositors in large
urban centers and rural agricultural regions withdrew their funds during the panic, with
state banks faring significantly better than national banks.
Finally, we examine whether extended liability regimes affected how banks managed
their asset portfolios during the panic. If state banks were insulated from runs due to the
feature of unlimited liability, it is possible that they held less cash than national banks.
Hence, we examine asset categories that reflect asset quality: cash, interbank deposits
(due from other banks), and total loans.
The results in Table 9 give some indication that during the panic, relative to national
banks, state decreased cash holdings, increased interbank deposits, and increased their
loan portfolios. These findings of a significant difference are robust to the inclusion of
bank characteristics controls and time fixed effects. Including bank fixed effects keeps
the sign of the coefficient on P AN ICt ∗ ST AT Ei , but reduces statistical significance.
Taken together, the results from the analysis show that the magnitude of deposit
losses in state banks was smaller than that of national banks. Our results suggest that
depositors found the protection by shareholder liability credible. To conclude, during the
period without deposit insurance, the banking system with shareholder liability effectively

28

Table 8: Regression results controlling for major financial centers
This table shows results from panel regressions of annual deposit growth rates as the dependent variable
for state and national banks in the state of California from 1890 to 1896. ST AT Ei is one if the observation
is for a state bank, and zero otherwise. P AN ICt is one if the observation is in 1893, and zero otherwise.
P OST P AN ICt is one if the observation is after 1893, and zero otherwise. LA SFi is one if the observation is for a bank located in the major financial centers of Los Angeles or San Francisco, and zero otherwise. Where included, bank characteristic controls are standardized and lagged one year. These controls
are the ratio of equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset ratio (zCashT oAssetsi,t−1 ),
loan quality (zU nsecuredT oT otalLoansi,t−1 ), and log of asset size (zLogT otalAssetsi,t−1 ). Regressions
(4) through (6) exclude the panic year (1893). Growth rates are in percentage. t-statistics clustered by
year are shown below each coefficient estimate.
(1)

(2)

(3)

(4)

(5)

(6)

103.149∗∗∗
3.927

7.638∗∗∗
2.642

10.800∗∗∗
4.944

98.401∗∗∗
4.841

4.677∗
1.921

6.938∗∗∗
2.841

-3.574∗∗
-2.261

-7.860∗∗∗
-4.014

-2.584∗∗
-2.341

-7.711∗∗∗
-7.129

1.907
0.382

8.517∗∗
1.983

-7.960∗∗∗
-2.785

0.148
0.039

-0.717
-0.125

0.182
0.029

-0.259
-0.050

-0.575
-0.115

-19.406∗∗∗
-7.968

-18.679∗∗∗
-7.081

11.858∗∗∗
7.500

11.868∗∗∗
7.062

10.954∗∗∗
5.482

0.166
0.033

0.659
0.135

-3.812
-0.667

-10.322∗
-1.794

-11.720∗∗
-2.097

-12.796∗
-1.777

P OST P AN ICt

-5.703
-1.470

-6.285∗
-1.722

P OST P AN ICt ∗ ST AT Ei

-0.868
-0.315

-1.182
-0.403

1.729
0.440

17.633∗∗∗
3.746

17.959∗∗∗
3.942

21.764∗∗∗
4.601

-1.385
-0.124

0.608
0.057

1.039
0.109

Constant

ST AT Ei

LA SFi

ST AT Ei ∗ LA SFi

P AN ICt

P AN ICt ∗ ST AT Ei

P AN ICt ∗ LA SFi

P AN ICt ∗ ST AT Ei ∗ LA SFi

P OST P AN ICt ∗ LA SFi

P OST P AN ICt ∗ ST AT Ei ∗ LA SFi

Bank Characteristics Controls
Time FE
Bank FE
Observations
Adjusted R2

No
No
No
783
0.026

Yes
No
No
783
0.055

Yes
Yes
Yes
783
0.192

No
No
No
655
0.013

Yes
No
No
655
0.061

Yes
Yes
Yes
655
0.225

∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01

29

Table 9: Regressions of growth in cash, interbank deposits, and loans
This table shows results from panel regressions for state and national banks in the state of California
from 1890 to 1896. The dependent variable for regressions shown in Panel A, B, and C are growth rates in
cash holdings, interbank deposits (amount due from other banks), and total loans, respectively. ST AT Ei
is one if the observation is for a state bank, and zero otherwise. P AN ICt is one if the observation is in
1893, and zero otherwise. P OST P AN ICt is one if the observation is after 1893, and zero otherwise.
Where included, bank characteristic controls are standardized and lagged one year. These controls are
the ratio of equity to liabilities (zEquityT oLiabilitiesi,t−1 ), cash to asset ratio (zCashT oAssetsi,t−1 ),
loan quality (zU nsecuredT oT otalLoansi,t−1 ), and log of asset size (zLogT otalAssetsi,t−1 ). Regressions
(5) through (10) exclude the panic year (1893). Growth rates are in percentage. t-statistics clustered by
year are shown below each coefficient estimate.
(1)

(2)

(3)

Constant

-4.456
-1.010

-2.105
-0.492

5.905
1.408

ST AT Ei

-1.381
-0.318

-3.699
-0.732

-3.351
-0.670

P AN ICt

32.374∗∗∗
7.339

27.168∗∗∗
7.282

-12.216∗∗∗
-2.813

-9.409∗∗
-2.404

(4)

(5)

(6)

(7)

(8)

224.824∗∗∗
6.638

217.619∗∗∗
6.176

(9)

(10)

-5.367
-0.948

-4.726
-1.228

-0.766
-0.560

225.163∗∗∗
4.462

219.229∗∗∗
4.228

5.566
1.647

4.560∗∗∗
3.159

4.969∗∗∗
3.386

1.677
0.190

3.298
0.413

-11.768∗
-1.888

-12.359∗∗
-2.232

-12.657∗∗
-2.328

657
0.005

657
0.082

657
0.097

657
0.184

3.946
1.251

12.801∗∗
2.190

30.854∗∗
2.459

-154.472
-1.089

1.664
0.143

-7.094
-0.442

-10.732
-0.716

P OST P AN ICt

21.794
1.006

18.209
0.896

P OST P AN ICt ∗ ST AT Ei

-7.701
-0.497

-7.589
-0.417

Panel A: Growth in cash holdings

P AN ICt ∗ ST AT Ei

18.044∗∗∗
3.699
-9.706∗∗
-2.554

-3.829
-0.749

-3.640
-0.706

P OST P AN ICt
P OST P AN ICt ∗ ST AT Ei
Observations
Adjusted R2

785
0.030

785
0.102

785
0.116

785
0.209

785
0.215

-123.141
-0.849

-150.025
-1.260

4.751
0.680
-8.742
-1.281

-9.219
-1.333
657
0.193

Panel B: Growth in interbank deposits (amount due from other banks)
Constant

15.786
1.234

20.473∗
1.726

P AN ICt

-93.683∗∗∗
-7.323

-91.386∗∗∗
-8.010

ST AT Ei

-1.443
-0.163

-7.614
-0.619

-9.776
-0.879

22.434∗∗
2.533

23.060∗∗
2.227

21.401∗∗
2.188

P AN ICt ∗ ST AT Ei

Observations
Adjusted R2

715
0.045

715
0.048

29.367∗∗∗
3.034

-127.093
-0.958

-84.889∗∗∗
-9.266

715
0.123

17.519
1.141

18.242
1.200

715
-0.084

715
0.002

71.542∗∗∗
4.555

58.790∗∗∗
5.150

603
-0.001

603
0.009

18.209
0.995
-5.554
-0.300

0.092
0.003

-2.831
-0.096

603
0.103

603
-0.126

603
-0.015

60.750∗∗∗
6.000

56.106∗∗∗
4.814

Panel C: Growth in total loans
Constant

0.516
0.141

-0.748
-0.205

6.503∗∗∗
4.672

3.831
0.942

3.747
0.842

5.677∗∗
2.158

ST AT Ei

-0.778
-0.457

0.617
0.373

1.103
0.632

1.840
0.735

1.910
0.581

2.302
0.698

P AN ICt

-2.113
-0.579

-0.809
-0.211

3.915∗∗
2.301

3.161∗∗
1.996

P OST P AN ICt

-6.143
-0.937

-6.836
-1.006

P OST P AN ICt ∗ ST AT Ei

-3.815
-1.260

-3.293
-1.002

P AN ICt ∗ ST AT Ei

Observations
Adjusted R2
Bank Characteristics Controls
Time FE
Bank FE

2.919
0.726
2.731∗
1.702

1.410
0.603

1.386
0.583
-6.076
-0.845
-3.506
-1.096

-2.967
-0.626

-3.018
-0.637

786
-0.003

786
0.041

786
0.140

786
0.259

786
0.342

658
0.052

658
0.102

658
0.158

658
0.329

658
0.376

No
No
No

Yes
No
No

Yes
Yes
No

Yes
No
Yes

Yes
Yes
Yes

No
No
No

Yes
No
No

Yes
Yes
No

Yes
No
Yes

Yes
Yes
Yes

∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01

30

mitigated contagious runs.

6

Conclusions

In the wake of the financial crisis of 2007-09, a number of countries substantially expanded
their safety nets to boost confidence in the banking system and to prevent potential
contagious runs. Critics worry that such actions might further reduce market discipline,
exacerbating moral hazard problems in bank risk-taking and making systems more fragile.
Under the current limited liability environment, deposit insurance provides banks with
greater incentives to increase asset risk and take on high leverage.
Prior to the Great Depression, bank deposits were protected by shareholders’ personal
wealth instead of government safety nets. In this paper, we examine whether extended
liability mitigated bank runs during the Panic of 1893. We study the banking system
in California where shareholders of state banks were subject to unlimited liability and
shareholders of national banks were subject to double liability. We find that extended
liability helped mitigate deposit withdrawals. While both state and national banks in
California experienced deposit outflows, the magnitude of outflows at state banks was
lower than at national banks.
Differences in shareholder liability regimes created differences in deposit outflows at
state and national banks through two possible channels. It might be because state banks
engaged in prudent banking with less asset risk and lower leverage. Given that depositors react to bank risk, safer banking practices by state banks insulated them from
contagious runs. Alternatively, state banks may have had less deposit outflows because
they provided more off-balance sheet protection to bank depositors. Under this scenario,
extended liability actually provided depositors incentives to ignore bank risk and foster
banking instability. Further investigation of the relationship between extended liability
and depositor behavior would help in designing a regulatory and institutional framework
that fosters appropriate incentives for both banks and depositors.

31

A

Appendix
Table A1: California banks that suspended during the Panic of 1893
Bank

Date of Failure

Riverside Banking Company
Farmers Exchange Bank - San Bernardino
Savings Bank of San Bernardino
Bank of Oceanside
Southern California National Bank - Los Angeles
Consolidated National Bank of San Diego
Savings Bank of San Diego
The Bank of Commerce - San Diego
The First National Bank of San Diego
Broadway Bank - Los Angeles
City Savings Bank - Los Angeles
East Side Bank - Los Angeles
First National Bank - Los Angeles
University Bank - Los Angeles
Bank of Anaheim - Anaheim
Bank of Orange - Orange
Citizens Bank - Ontario
The Commercial Bank - Santa Ana
The First National Bank - Santa Ana
The Los Nietos Bank - Downey
The People’s Bank - Pomona
Bank of Madera - Madera
Pacific Bank - San Francisco
Peoples Home Savings Bank - San Francisco
The First National Bank of San Bernardino
The Loan and Savings Bank of Fresno

32

6/14/1893
6/17/1893
6/17/1893
6/20/1893
6/20/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/21/1893
6/22/1893
6/22/1893
6/22/1893
6/22/1893
6/22/1893
6/22/1893
6/23/1893
6/23/1893
6/23/1893
6/23/1893
6/24/1893

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34