Prior to the Civil War several states established bank liability
insurance schemes of two basic types. One was an insurance fund,
in which member banks paid into a state-run fund that would pay
losses of bank creditors. The other was a mutual guarantee
system, in which survivor banks were legally responsible the
liabilities of any bank that became insolvent. Both schemes did
well at insuring bank creditors, but neither prevented bank
panics. Bank failure rates were somewhat higher for banks that
were part of these schemes. The experience with these schemes
shows that regulatory incentives matter for controlling moral
hazard. The schemes that provided the most control of moral
hazard were those that had a high degree of mutuality of losses
borne by all banks participating in the scheme.