Howard Bodenhorn writes,

Beginning in the 1810s, several states imposed double liability on chartered commercial
banks. . .

Relying on cross-sectional data Macey and Miller (1992) and Grossman (2001) find that double liability actually increased measured bank leverage, an apparently counterintuitive result they attribute to double liability serving to reassure creditors that they would be made whole in the event of bank failure. To the extent that double liability served as an implicit, off-balance-sheet increase in the bank’s capital account, the increase in measured leverage overstates creditor risk and explains the counterintuitive result.

Remarks:

1. Double liability for shareholders is not as strong as a proposal that I have made, which is that bank managers serve prison terms in the event of bank failure.

2. I think that double liability works well only if the bank’s ownership is highly concentrated. In that case, I assume that the shareholders would be able to exert strong influence on the bank’s practices.

3. There are two forms of leverage: financial leverage, which is the ratio of debt to equity; and operating leverage, which is the risk of the firm’s assets. Assuming that bank creditors were rational, they must have believed that the double-liability firms were employing less operating leverage than their peers.