For Richer, For Poorer

Transcription

1 1/34 For Richer, For Poorer Bankers Liability and Risk Taking in New England, Peter Koudijs (Stanford & NBER) Laura Salisbury (York University & NBER) Gurpal Sran (University of Chicago) April 2018

2 2/34 Motivation Financial crisis and asymmetric payoff to bank managers: Heads you become richer than Croesus; tails, you get no bonus. (Blinder, 2009) Claim: Managers limited liability incentivizes risk taking Empirically, diffi cult to evaluate No clear counterfactual without limited liability This paper: Back to the past: bank managers with additional liability Setting with plausibly exogenous variation

3 3/34 This paper 450 banks and their CEOs ( Presidents ) in New England between 1867 and 1880 Most modern/industrialized area of the U.S. Loans to local businesses, checkable deposits No deposit insurance Closely held (CEO owns 15% of shares) Shares carry double liability

4 3/34 This paper 450 banks and their CEOs ( Presidents ) in New England between 1867 and 1880 Most modern/industrialized area of the U.S. Loans to local businesses, checkable deposits No deposit insurance Closely held (CEO owns 15% of shares) Shares carry double liability Marital regime differences in personal liability Initially: husband gets ownership of wife s assets : states pass Married Women s Property Acts (MWPAs) prospective only Wealth of bank CEO s wife protected if married after a MWPA

5 3/34 This paper 450 banks and their CEOs ( Presidents ) in New England between 1867 and 1880 Most modern/industrialized area of the U.S. Loans to local businesses, checkable deposits No deposit insurance Closely held (CEO owns 15% of shares) Shares carry double liability Marital regime differences in personal liability Initially: husband gets ownership of wife s assets : states pass Married Women s Property Acts (MWPAs) prospective only Wealth of bank CEO s wife protected if married after a MWPA Compare riskiness of banks managed by CEOs married before/after a MWPA, in the same year, same location No use of ownership data

6 4/34 Timeline (1) (2) (3) States pass MWPAs Economic growth Panic and Depression Ex ante risk taking: Ex post performance: - Leverage - Losses - Risky loans - Reduction in deposits - Reduction in loans

7 4/34 Timeline (1) (2) (3) States pass MWPAs Economic growth Panic and Depression Ex ante risk taking: Ex post performance: - Leverage - Losses - Risky loans - Reduction in deposits - Reduction in loans Obvious that limiting bank CEOs liability increases risk taking? Personal reputation, bank-specific human capital Reaction other stakeholders, e.g. depositors Koudijs and Salisbury (2016): evidence from U.S. South that MWPAs could reduce household leverage.

8 Related literature Most closely related Roussanov and Savor (2014): marriage and risk Wei and Yermack (2011): inside debt non-financials Schoenherr (2017): managers after bankrupcty Calomiris and Carlson (2016): manager ownership and bank risk taking in 1890s Bank managers shareholdings and risk taking Recent financial crisis: Fahlenbrach and Stulz (2011), Berger, Imbierowicz and Rauch (2015). Earlier work: Gorton and Rosen (1995), Demsetz, Saidenberg and Strahan (1997) Double liability bank equity before 1933 U.S.: Esty (1998), Grossman (2001, 2007), Mitchener and Richardson (2013), Aldunate et al. (2018) U.K.: Acheson and Turner (2003, 2006), Turner (2014) Banking in New England: Lamoreaux (1994), Meissner (2005), Hilt (2016) 5/34

9 6/34 Outline 1. Historical background 2. Data 3. Empirical results a. Variation in marriage protection b. Main results 4. Conclusion

10 7/34 Banking National Banks Unit banks: local Checkable deposits, broad deposit base Commercial banking: commercial and accommodation paper (Issued bank notes, collateralized by government securities)

11 7/34 Banking National Banks Unit banks: local Checkable deposits, broad deposit base Commercial banking: commercial and accommodation paper (Issued bank notes, collateralized by government securities) Regulated by OCC Upon default, acts as receiver Shares carry double liability Minimum capital-size requirement: f (town population) Minimum cash requirement (15-25% banknotes and deposits) Restrictions on the asset side (no mortgages, no loans > 10% capital) Restrictions on paying dividends from capital No deposit insurance

12 8/34 Typical (simplified) balance sheet Assets Liabilities Cash Paid-in capital Loans and discounts Retained earnings - Accommodation paper Deposits - Commercial paper Securities Government bonds Bank notes

13 9/34 Bank President Local, prominent and rich business man Selection Family connections Heir apparent

14 9/34 Bank President Local, prominent and rich business man Selection Family connections Heir apparent Incomplete information on shareholdings (88 banks / 111 bankers)

15 10/34 Double liability OCC has legal authority to collect stockholders liability (confirmed by U.S. Supreme Court in 1868, 75 U.S. 498) During approximately 41% of double liability claims successfully collected (Macey and Miller 1992) Collection unsuccessful when Stockholder insolvent Assets not accessible or not come-at-able (OCC annual reports).

16 11/34 Marriage law Common law Upon marriage, wife s property became husband s Liable for husband s debts Pre-nuptial agreements Uncertainty. Enforced under equity law - not well established in New England Use limited

17 11/34 Marriage law Common law Upon marriage, wife s property became husband s Liable for husband s debts Pre-nuptial agreements Uncertainty. Enforced under equity law - not well established in New England Use limited Introduction MWPAs, 1840s-1850s Wife s property held in her own name (incl. inheritance and family gifts acquired later in life, excl. gifts husband) Explicitly protected from husband s creditors

18 11/34 Marriage law Common law Upon marriage, wife s property became husband s Liable for husband s debts Pre-nuptial agreements Uncertainty. Enforced under equity law - not well established in New England Use limited Introduction MWPAs, 1840s-1850s Wife s property held in her own name (incl. inheritance and family gifts acquired later in life, excl. gifts husband) Explicitly protected from husband s creditors Limited bankruptcy protection 1870s Bankruptcy exemptions: $500 - $1,300 (median 1870 household wealth: $50,000)

19 12/34 Legislative dates

20 Important element legal system Massachusetts; Married Women: The real and personal estate of a married woman, acquired at any time, remains her sole and separate property, not liable for his debts. Next to Assignment and insolvency, Attachment, and Exemptions 13/34

21 14/34 Historical context Boom-bust economy Post-war expansion ( ) Panic of 1873 Railroad boom turned bust Default investment bank Jay Cooke & Co.; run on affi liated banks Collapse of margin loan market; stock market panic (closed September 20-30) Overall run on banking system The Crime of 1873 Monetary deflation; U.S. back on Gold Standard 1879 Long Depression of

22 Introduction Historical background Data Empirical results Conclusion Example: Elijah C. Drew President Eleventh Ward Bank of Boston (est. in 1872), owns 15% of stock: $45,000 Married to Hannah H. Haynes (1855; second marriage, after MWPA) Sole heir to $250,000 (father dies in 1873, only sibling died in 1854) Mrs Drew is rich in her own right by her father of unencumbered property Drew is building Commonwealth hotel: mortgaged 15/34

23 16/34 Example - cont. Risk taking Loans to risky (unrated) borrowers Excessive dividends, rolling over bad loans High leverage, further increase in 1876 Failure in Jan 1877 No-one anticipated the hard times that followed, the assets have shrunk beyond anything in my experience, firms have petered out, mortgages, equities have gone out of sight Claim against Drew doubtful Appraised value Commonwealth hotel: $266,000 Claims against Drew s estate: $380,000 Mrs Drew s wealth protected 1877: Mrs. Drew says she will support bank to save Drew s good name 1878: Instead, Mrs. Drew claims ownership of the few remaining assets

24 17/34 Data sources Annual Call reports OCC, Simple balance sheet items Annual Examiner reports, Bad loans Profits and losses Ancestry.com; familysearch.org Marriage records Population census records 1870: household wealth 1850 population census Familial wealth husband and wife: real estate by surname and state (w M and w F )

25 18/34 Measure of 1850 familial wealth Log Total Wealth (1870) log(wm+wf) (1850)

26 19/34 Empirical strategy What drives marriage after MWPA? 1. State passes MWPA early ( ) 2. Marriage later in life a. Preference b. Death of first wife 3. Younger age Introduce fixed effects step-by-step: 1. County fixed effects (subsumes state) 2. Year of first marriage fixed effects (5 year bins) 3. Year of birth fixed effects (5 year bins) Interpretation: single / double / triple diff.

27 20/34 Hypothetical example of six bankers (keeping age constant) Table: Leverage in 1870 year of mar. CT MA

28 20/34 Hypothetical example of six bankers (keeping age constant) Table: Leverage in 1870 year of mar. CT MA Table: Single diff. year of mar. CT MA

29 20/34 Hypothetical example of six bankers (keeping age constant) Table: Leverage in 1870 year of mar. CT MA Table: Double diff. (1) year of mar. CT MA Table: Single diff. year of mar. CT MA

30 20/34 Hypothetical example of six bankers (keeping age constant) Table: Leverage in 1870 year of mar. CT MA Table: Double diff. (1) year of mar. CT MA Table: Single diff. year of mar. CT MA Table: Double diff. (2) year of mar. CT MA

31 21/34 Ex ante risk taking 1. Leverage ( ) L i,t = ap i,t + bx i + τ t + ψ i + ε i,t for bank i, and year t L i,t : (Loans and securities)/capital X i : Boston and town population dummies; τ t year fixed effects, and ψ i set of fixed effects. 2. Realizing losses ( ) Y i,t = ap i,t + bx i + ca i,t + τ t + ψ i + ε i,t Y i,t : Fraction loans in arrears kept alive; fraction loans in arrears written down A i,t : Fraction all loans in arrears 3. Heterogeneous effect in relative familial wealth husband and wife: log(w F /w M )

32 22/34 Leverage ( )

33 23/34 Heterogeneity (Loans and Securities)/Capital Log Wf/Wm Protected (5 95 CI) Not Protected (5 95 CI)

34 24/34 Realizing losses ( )

35 25/34 Ex post performance 1. Loans contrary to law Y i,max = ap i, bx i + ψ i + η i Y i,max : loans exceeding 10% of capital and mortgages over 1873 capital: max{y i,t } over Performance Y i,t 1873 = ap i, bx i + ψ i + η i Y i,t 1873 : accumulated profits and losses over 1873 capital; log change in deposits; log change in loans between 1873 and t [1874, 1880] X i : Boston and town population dummies; ψ i set of fixed effects. 3. Heterogeneous effect in relative familial wealth husband and wife: log(w F /w M )

36 26/34 Loans contrary to law

37 27/34 Profits and losses, Coefficient on Protection Earnings/Capital,

38 28/34 Change in deposits, Coefficient on Protection Log Change in Deposits,

39 29/34 Change in loans, Coefficient on Protection Log Change in Loans,

40 30/34 Performance,

41 31/34 Heterogeneity - profits and losses Earnings/Capital, Log Wf/Wm Not Protected (5 95 CI) Protected (5 95 CI)

42 32/34 Heterogeneity - change in deposits Log change in deposits, Log Wf/Wm Not Protected (5 95 CI) Protected (5 95 CI)

43 33/34 Heterogeneity - change in loans Log change in loans, Log Wf/Wm Not Protected (5 95 CI) Protected (5 95 CI)

44 34/34 Conclusion Limited liability for bank CEOs increases ex ante risk taking: Higher leverage Greater reluctance to realize losses More loans in violation of the law Even in absence of deposit insurance, depositors do not (fully) discipline banker

45 34/34 Conclusion Limited liability for bank CEOs increases ex ante risk taking: Higher leverage Greater reluctance to realize losses More loans in violation of the law Even in absence of deposit insurance, depositors do not (fully) discipline banker Contrasts with Koudijs and Salisbury (2016) Reduction in leverage for households with large fraction of wealth in the wife s name Atomistic depositors vs limited number of lenders

46 34/34 Conclusion Limited liability for bank CEOs increases ex ante risk taking: Higher leverage Greater reluctance to realize losses More loans in violation of the law Even in absence of deposit insurance, depositors do not (fully) discipline banker Contrasts with Koudijs and Salisbury (2016) Reduction in leverage for households with large fraction of wealth in the wife s name Atomistic depositors vs limited number of lenders Limited liability for bank CEOs leads to more deleveraging after a bad shock More losses Larger drop in deposits and loans Depositors do act in a Panic

47 34/34 Conclusion Limited liability for bank CEOs increases ex ante risk taking: Higher leverage Greater reluctance to realize losses More loans in violation of the law Even in absence of deposit insurance, depositors do not (fully) discipline banker Contrasts with Koudijs and Salisbury (2016) Reduction in leverage for households with large fraction of wealth in the wife s name Atomistic depositors vs limited number of lenders Limited liability for bank CEOs leads to more deleveraging after a bad shock More losses Larger drop in deposits and loans Depositors do act in a Panic Future work: impact on individual firms

48 35/34 Summary statistics Bankers

49 36/34 Protection status and banker characteristics (1) All Presidents in our sample (728) P i = ax i + ε Protection president P i {0, 1}: married before/after MWPA X i : President age, 1870 household wealth, bank age, difference familial wealth husband and wife (log(w F /w M ))

50 37/34 Protection status and banker characteristics (2)

51 38/34 Strategic marriage Distribution of marriages around MWPAs Age-at-marriage around MWPAs Fraction Years before/after MWPA Banker age at marriage Years before/after MWPA

52 39/34 Selection (1) Newly appointed bank presidents (144 cases) P i,t = ay i,t 1 + ψ i + ε i,t Protection president P i,t {0, 1} at bank i, and year t Y i,t 1 : log(assets), (loans and securities)/capital in year before; ψ i : state or county fixed effects.

53 40/34 Selection (2)

54 41/34 When is wife s wealth affected? (1) Bank invests λc 0, with λ leverage ratio and C 0 initial capital Shock δ [ 1, 0] to assets A = (1 + δ) λc 0 C = A (λ 1) C 0 = (1 + δλ) C 0 Bank president owns fraction β of bank s shares: βc 0 Double liability claims if βc < 0

55 42/34 When is wife s wealth affected? (2) Initial household wealth W 0, with fraction α in the wife s name Husband s free assets: (1 α)w 0 βc 0 Sensitive to shock δ: ρ (0, 1) Wife s wealth affected when max { βc, βc 0 } + (1 + ρδ) [(1 α) W0 βc 0 ] < 0 Depends on δ: δ < f (α, β, λ, ρ, C 0, W 0 )

56 Introduction Historical background Data Empirical results Conclusion When is wife s wealth a ected? (3) λ1 : Assets / Capital. λ2 : (Loans and Securities) / Capital 43/34

57 44/34 Simplified setting: assumptions Bank funds assets with equity and deposits Equity E Unlimited liability Restricted: banker s own wealth, E W (more generally, γe W ) Deposits D D Banker Depositors small, price takers, and risk-neutral Risk averse Fraction α of wealth W protected (if not invested in the bank) Two states of the world, R {R, R} with probabilities {π, (1 π)} and E [R] > r f = 1 Risk taking leverage

58 45/34 Pre MWPA α = 0 Risky deposits (suff. large D that is not repaid in bad state) In bad state, regulator can seize all of the banker s wealth High marginal utility Suppose E = W, then ([ ] ) πu(0) + (1 π)u W + D R (1 + ρ) D with U() concave and ρ default premium. Risk free deposits (suff. small D that is always repaid) Positive return in bad state: lower marginal utility πu ([W + D ] R D ) + (1 π)u ( [W + D ] R D ) with D < D

59 46/34 Post MWPA α (0, 1) Risky deposits In bad state, guaranteed consumption αw Suppose E = (1 α)w, then ([ ] ) πu(αw ) + (1 π)u (1 α)w + D R (1 + ρ) D Risk free deposits πu ([W + D ] R D ) + (1 π)u ( [W + D ] R D ) D D if α > α higher leverage Additional effect on leverage If α > α : E = (1 α)w If α α : E = W