THE SLACK BANKER DANCES - DEPOSIT INSURANCE AND RISK-TAKING IN THE BANKING COLLAPSE OF THE 1920S

This article examines the effects of deposit insurance on bank behavio r in Kansas during the 1920s. Kansas banks were severely stressed by a collapse of commodity prices in 1920 and the resulting increase in lo an defaults. We find that banks belonging to the state deposit insuran ce system maintained lower capital/asset ratios, which may explain the ir comparatively high failure rate. Despite delays, and eventual suspe nsion of insurance payments, we find no evidence of a decline in the c redibility of insurance, and hence in the ability of insured banks to take excessive risks, before the system's collapse in 1926. (C) 1994 A cademic Press, Inc.