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Liability structure and the flight to liquidity : Evidence from swedish banks during the great depression

Zhao, Liang LU and Ögren, Anders LU (2026) In Finance Research Letters 87.
Abstract

This paper investigates how bank liability regimes shaped liquidity responses during the Great Depression in Sweden. Using monthly balance sheet data (1929-1934), we find that unlimited liability banks increased liquid assets more aggressively in response to monetary tightening and crisis, reallocating away from securities. In contrast, limited liability banks exhibited weaker responses. Mechanism tests reveal higher risk tolerance and funding fragility among limited liability banks, suggesting that internal incentives and external constraints jointly explain institutional heterogeneity in crisis behavior.

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author
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organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Great depression, Limited liability bank, Liquidity ratio, Risk-taking, Unlimited liability bank
in
Finance Research Letters
volume
87
article number
109033
publisher
Elsevier
external identifiers
  • scopus:105023328891
ISSN
1544-6123
DOI
10.1016/j.frl.2025.109033
language
English
LU publication?
yes
id
eb502d8e-ee06-40f0-83a5-a5927d147bd0
date added to LUP
2026-02-11 10:11:02
date last changed
2026-02-11 10:12:12
@article{eb502d8e-ee06-40f0-83a5-a5927d147bd0,
  abstract     = {{<p>This paper investigates how bank liability regimes shaped liquidity responses during the Great Depression in Sweden. Using monthly balance sheet data (1929-1934), we find that unlimited liability banks increased liquid assets more aggressively in response to monetary tightening and crisis, reallocating away from securities. In contrast, limited liability banks exhibited weaker responses. Mechanism tests reveal higher risk tolerance and funding fragility among limited liability banks, suggesting that internal incentives and external constraints jointly explain institutional heterogeneity in crisis behavior.</p>}},
  author       = {{Zhao, Liang and Ögren, Anders}},
  issn         = {{1544-6123}},
  keywords     = {{Great depression; Limited liability bank; Liquidity ratio; Risk-taking; Unlimited liability bank}},
  language     = {{eng}},
  publisher    = {{Elsevier}},
  series       = {{Finance Research Letters}},
  title        = {{Liability structure and the flight to liquidity : Evidence from swedish banks during the great depression}},
  url          = {{http://dx.doi.org/10.1016/j.frl.2025.109033}},
  doi          = {{10.1016/j.frl.2025.109033}},
  volume       = {{87}},
  year         = {{2026}},
}