Unlimiting Unlimited Liability : Legal Equality for Swedish Banks with Alternative Shareholder Liability Regimes (1897-1903)

• This paper examines the aftermath of the 1897 Riksbank Act in Swedish banking. The Act placed banks with unlimited and limited liability upon equal footing, removing the note issuing privileges of the former. We consider whether changes in risk preferences occurred subsequent to the Act, or whether extended liability was a sufficient deterrent. We conclude that when legal differences were removed, lower transaction costs for ULBs spurred aggressive competition reflected in narrower interest spreads relative to LLBs. ULBs also took on greater leverage and held less liquidity, which supports the Coasean interpretation that shareholder liability regime mattered little. After 1897, ULB shareholders continued to receive higher dividends, enjoyed substantially superior returns on equity and maintained an array of corporate governance controls to shield themselves against their additional risk.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Ekonomisk historia (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economic History (hsv//eng)

Keyword

Extended shareholder liability

corporate governance

Sweden

note issuance

asset and liability management

Banking stability

Bank Regulation

Publication and Content Type

art (subject category)

ref (subject category)