Dynamic depositor discipline in US banks |
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| Institution: | 1. Utrecht School of Economics, Utrecht University, Utrecht, The Netherlands;2. Supervisory Policy Division, De Nederlandsche Bank, Amsterdam, The Netherlands and Department of Economics, University of Groningen, Groningen, The Netherlands;1. University of Magdeburg, Germany;2. IWH Halle, Germany;3. CESifo, Germany;4. Deutsche Bundesbank, Germany;1. Department of Economics and Finance, University of Canterbury, Private Bag 4800, Christchurch 8140, New Zealand;2. Department of Finance, Iowa State University, 3111 Gerdin, Ames, IA 50011, USA;3. Terry College of Business, University of Georgia, 305 Brooks Hall, Athens, GA 30602, USA;4. Department of Economics, Iowa State University, 460D Heady Hall, Ames, IA 50011, USA;1. Université de Limoges, Limoges, France;2. University of Birmingham, Birmingham, UK;1. Stanford University, Landau Economics Building, 579 Serra Mall, Stanford, CA 94305-6072, United States;2. Pennsylvania State University, Smeal College of Business, 350 Business Building, University Park, PA 16802, United States;3. Office of the Comptroller of the Currency, U.S. Department of the Treasury, 400 7th Street SW, Mail Stop 6E-3, Washington, DC 20219, United States;1. School of Management, Huazhong University of Science and Technology, Wuhan (430074), Hubei, China;2. Department of Accounting & Information Systems, Comilla University, Comilla (3506), Bangladesh;3. International School, East China Jiao Tong University, Nanchang (330013), Jiangxi, China;4. International Institute for Financial Studies, Jiangxi University of Finance and Economics, Nanchang (330013), Jiangxi, China;5. School of Business, Department of AIS, University of Chittagong, Chittagong (4331), Bangladesh;1. Imperial College Business School, United Kingdom;2. Accounting Department, Kozminski University, Poland;3. Institute of Economics of the Polish Academy of Science (INE PAN), Poland;4. World Economy Research Institute, Warsaw School of Economics (SGH), Poland;5. VU University Amsterdam and Duisenberg School of Finance, The Netherlands |
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| Abstract: | This paper captures banks’ dynamic response to depositor discipline. Recognizing that the price and quantity response of uninsured deposits in the face of deteriorating fundamentals needs to be modeled as an endogenous process, we investigate how depositor discipline constrains banks’ behavior by extracting the impact of an exogenous rise in interest rates on the quantity of uninsured deposits. We find that good banks can raise uninsured deposits by raising their price, while weak banks cannot. This suggests that depositor discipline not only raises the cost of choosing a higher level of risk but also may, at very high levels of risk, effectively constrain bank managers’ behavior. |
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