Skin in the
A study of 19th-century marital laws
shows banks took fewer risks when managers
were held personally accountable for failure.
BY SACHIN WAIKAR
THE GOOD OLD DAYS OF
PERSONAL LIABILIT Y
It’s logical, then, that placing more of bank
losses “directly on the shoulders of bank
managers,” as Koudijs puts it — in the form
of increased personal liability — might
result in more responsible decision-making
and lower the likelihood of large-scale
negative outcomes like the Great Recession.
In fact, liability clauses in pre-1930s U.S.
banking put the bankers at great personal
risk if they made unsafe investments with
their depositors’ money.
“We’ve basically done away with
personal liability in banking since then,”
Koudijs says. “Now the debate is whether to
bring it back.”
The researchers studied the New
England banking system of the 1870s,
comparing the actions of bank presidents
who were personally liable for the risks they
took with those who were not.
The difference hinged on bankers’
marital status. Before the mid-19th century,
husbands legally had unconstrained access
to their wives’ assets, including cash,
securities, and others. Thus, any claim on
a husband’s assets extended to his wife’s
property as well. But laws passed during the
1840s and 1850s protected a wife’s assets
from such seizure, which limited a married
couple’s overall liability in the face of
a financial claim.
What does the timing of bankers’ marriages
in mid-19th-century New England
have to do with the current debate over
A lot, according to recent research by
Stanford GSB finance professor Peter Koudijs.
His paper, “For Richer, For Poorer: Banker’s
Liability and Risk-Taking in New England,
1867-1880,” written with Laura Salisbury
(York University) and Gurpal Sran (University
of Chicago), studies the association between
personal liability and risk-taking among bank
managers of that time.
The researchers found that 19th-century
bankers who faced less personal liability
due to new marital-property laws were more
willing to take risks than their counterparts
with more such liability. The findings have
implications for liability-related policy
related to bank executives today.
“There’s a lot of current policy debate
in the U. S. about how best to organize
banking and monitor bank managers,”
Koudijs says. “One argument is that the
recent financial crisis was caused because
bank managers didn’t have enough skin in
the game. If they took significant risk and
it paid off, they could make large bonuses.
But if they failed, they wouldn’t personally