DEPOSIT INSURANCE and BANK FAILURES: NEW EVIDENCE FROM THE 1920s

This paper examines the contribution of deposit insurance to bank failures during the 1920s. Using individual bank data from Kansas, where membership in the state insurance system was voluntary, I find that the balance sheets of insured banks reflected greater risk-taking, and probit model estimates indicate that insured banks were more likely to fail than non-insured banks. Insurance had an especially strong impact the closer a bank was to failure. Because regulation was comparatively strict in Kansas the findings suggest that deposit insurance had an even greater impact in other states and in the recent U.S. experience.