A Tale of Two Runs: Depositor Responses to Bank Solvency Risk

We examine heterogeneity in depositor responses to solvency risk using depositor‐level data for a bank that faced two different runs. We find that depositors with loans and bank staff are less likely to run than others during a low‐solvency‐risk shock, but are more likely to run during a high‐solvency‐risk shock. Uninsured depositors are also sensitive to bank solvency. In contrast, depositors with older accounts run less, and those with frequent past transactions run more, irrespective of the underlying risk. Our results show that the fragility of a bank depends on the composition of its deposit base.     

Optimal Forbearance of Bank Resolution

This paper analyzes a regulator's optimal strategic delay of resolving banks when the regulator's announcement of the intervention delay endogenously affects the depositors' run propensity. Given intervention, the regulator either liquidates the remaining illiquid assets (“prompt corrective action”) or continues managing the assets at a reduced skill level (“resolution under receivership”). In either case, I show that if the regulator tolerates fewer withdrawals until intervention, the depositors may react by preempting the regulator: they run on the bank more often ex ante. A policy of never intervening can leave the bank more stable than a conservative intervention policy.     

Why Do Bank Runs Look Like Panic? A New Explanation

This paper demonstrates that, even if depositors are fully rational and always choose the Pareto-dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors' expectations on the bank's fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information will be revealed, or when they learn that precise bank-specific information will not be revealed. The results in this paper are consistent with the empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.     

论存款保险制度下的风险防范

存款保险制度是一种金融保障制度。建立存款保险制度有利于降低金融风险,防止挤兑发生及危机扩散。当个别银行出现流动性风险时,存款人因为有了相关的法律制度作保证,不再产生巨大的恐惧心理,能避免发生挤兑风潮。同时,建立存款保险制度有利于保护存款人的利益。在投保银行面临支付危机时提供救助,在投保银行破产倒闭时依法清偿存款人的存款,从而保护了存款人的利益。     

The transparency of the banking system and the efficiency of information-based bank runs

In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit contract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An improvement in the transparency of a bank may reduce depositor welfare by increasing the chance of an inefficient contagious run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers' control over the timing of information disclosure, and find that bank managers may use their influence to eliminate both inefficient and efficient bank runs.     

商业银行挤兑机理及信息层叠概率计算

从存款者类型、群体信念、私有信息、存款者决策行为四个方面构建信息结构来研究商业银行挤兑机理,探讨了存款者从商业银行投资信息市场接收到好信号或者坏信号情况下,商业银行投资收益仍属于高收益或低收益的群体信念后验概率;计算了耐心存款者无信息层叠概率、无挤兑信息层叠概率和挤兑信息层叠概率。得出提高存款者信息精确度既可以消除银行挤兑的重要根源——信息不对称问题,又有利于经营状况良好的银行稳步发展,防止经营状态差的银行掩盖风险,督促银行经营者加强风险控制。     

On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis

This article reports an experiment conducted to evaluate the effects of alterations in the terms of repayments to depositors following a liquidity suspension, as well as the effect of alterations in the publicity of information about withdrawal behavior on the fragility of distressed banks. Results indicate that a “tough” renegotiation stance of protecting depositors who maintain their money in the bank, can quite effectively promote stability. Information provided to depositors regarding past withdrawal behavior weakens the effectiveness of a tough renegotiation policy but reduces fragility somewhat for a more lenient rescheduling condition.     

Correlated bank runs,interbank markets and reserve requirements

This article extends the application of global games of Goldstein and Pauzner (2005) in the banking model of Diamond and Dybvig (1983) to account for correlation in the quality of banks’ long term investment, when banks are linked through cross deposits and there is a central bank. The goal is to study how these elements affect the deposit contract that banks offer to depositors and the ex ante probability of a bank run. We show that the coexistence of a central bank, which determines banks’ reserve requirements, and an interbank market, which redistributes reserves, leads to a smaller probability of a bank run and to fewer inefficient bank runs, relative to the case with no central bank and no interbank market. By adequately choosing the level of reserves to store, the central bank can improve the equilibrium outcome and allow banks to offer a higher interim payment to depositors, relative to the situation with no cross deposits.     

Destructive effects of constructive ambiguity in risky times

Unclear bailout policy, underinvestment and calls for greater responsibility by bankers are some of the observations from the recent financial crisis. The paper explains underinvestment as an inefficient equilibrium. Under ambiguous bailout policy agents suffer from a lack of information about the insolvency resolution methods. The beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy. This disrupts the flow of funds through the banking channel if the investment climate is characterized by high aggregate risk. The paper suggests policy implications aimed at a reduction of the anxiety of agents and at aligning their beliefs to restore efficiency.     

Market discipline during crisis: Evidence from bank depositors in transition countries

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results indicate that depositors react rationally to sources of information other than financial statements; this discovery has policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.     

Bank Time Deposit Rates and Market Discipline in Poland: The Impact of State Ownership and Deposit Insurance Reform

This paper examines the impact of ownership structure and changes in the deposit insurance system on the market for bank time deposits in Poland. In an environment of less restrictive bank supervision and a deposit insurance policy that favored state banks, we find that depositors exacted a price for risk-taking. After a new law increasing insurance coverage for private banks went into effect, however, bank specific variables became less important in explaining differences in deposit interest rates. We report, however, that the three fully guaranteed state banks pay significantly lower rates than private banks. Moreover, other state-owned banks, with the same explicit guarantee as private banks, pay significantly lower rates than private banks, so it appears that depositors treat these state-owned banks as if they have a larger implicit guarantee.     

Policy uncertainty and bank’s funding costs: The effects of the financial crisis,Covid-19 pandemic,and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.     

Market discipline by bank creditors during the 2008–2010 crisis

We investigate whether uninsured depositors, insured depositors, and general creditors exhibit evidence of quantity market discipline during the recent financial crisis. To establish which types of creditors expect to incur loss, we evaluate the FDIC's expectations about losses to creditors at banks that failed between 2008 and 2010. Our results show that quantity market discipline tends to begin far enough in advance to signal to both banks and supervisors that corrective actions can and should be taken. Furthermore, creditors are able to distinguish between banks of different risk levels. Our findings support several policy implications for encouraging market discipline.     

Depositors’ trust: Some empirical evidence from Indonesia

We develop a comprehensive index, based on Robbins and Judge’s (2008) five dimensions of trust, to measure depositors’ trust in individual banks as well as trust in the banking industry and financial safety net. Using a survey of 992 retail depositors in Indonesia, we find that trust in individual banks where depositors save their money is greater than trust in the overall banking industry and financial safety net. We also find that depositors’ trust is affected by personal characteristics—for instance, women and older depositors have relatively less trust. Depositors tend to put their trust in individual banks and the financial system if they have greater trust in information conveyed by the government. Religious and economic values have positive effects on depositors’ trust at both the micro and macro levels. Our results also document that risk-taking behavior is positively associated with depositors’ trust. Furthermore, we find that more-educated depositors have significantly less trust. This finding might imply that the erosion of market discipline by depositors in a country with relatively generous deposit insurance, such as Indonesia, can be mitigated through greater financial literacy.     

Deposit Insurance and Depositor Monitoring: Quasi-Experimental Evidence from the Creation of the Federal Deposit Insurance Corporation

The Banking Acts of 1933 and 1935 insured deposits up to $5,000 and limited interest paid by commercial banks. This essay uses a treatment-and-control estimation strategy to determine how those reforms influenced depositors’ reactions to information about banks’ balance sheets by comparing preferred and regular depositors at New York state banks. Before deposit insurance, regular depositors reacted more to information about banks, while preferred depositors reacted less. After, this difference diminished and almost disappeared. This change indicates insurance reduced monitoring, although depositors’ continued response to some information indicates that large, uninsured depositors continued to monitor banks, as the legislation intended.     

Aid econometrics: Lessons from a stochastic growth model

This paper evaluates the standard empirical methods employed in the study of foreign aid, when the data generating process is a calibrated stochastic growth model in which aid recipients make optimal investment and consumption decisions. When recipients receive a stochastic flow of aid and wish to smooth consumption, standard methods fail to distinguish between the response to transient and permanent aid shocks, and hence yield misleading results concerning the object of interest to policy makers: the long-run impact of aid.     

Canadian Provincial Budget Outcomes: A Long–run and Short–run Perspective

This paper tests a theory of public budgeting as a long–run and short–run process. In this model, political decision makers strive to achieve budgetary balance over the long–run but are constrained in the short–run and follow incremental decision–making. First, the budget equilibrium theory is elaborated upon and is used to explain the relationship between revenues, expenditures, and debt along with control variables one being provincial general elections. Second, the interaction between these variables is tested with a vector error correction model for each of the Canadian provinces using annual data between 1961 and 2000. The results show that in the long–run the driving force of provincial budgeting was expenditure control initiatives in seven of the ten provinces. In the short–run, incrementalism occurred in all of the provinces and a political business cycle was evident in six provinces.     

Fiscal Decentralisation and Economic Growth in High‐Income OECD Countries

Among the majority of high–income OECD countries, the degree of fiscal decentralisation has converged over the last 30 years towards an intermediate level. The theoretical arguments for and against fiscal decentralisation point to explanations for this tendency, because both extreme decentralisation and extreme centralisation are associated with disadvantages for economic growth. Hence, the observed trend of convergence would be growth–promoting. The paper analyses the long–run empirical relationship between per capita economic growth, capital formation and total factor productivity growth, and fiscal decentralisation for the high–income OECD countries. The evidence supports the view that the relationship is positive when fiscal decentralisation is increasing from low levels, but then reaches a peak and turns negative. A policy implication is that policy–makers in several countries with relatively low degrees of fiscal decentralisation could possibly mobilise growth reserves by increasing it.     

Home Capital Group—The High Cost of Dishonesty

This instructional case presents the problems that began in the summer of 2015 when Home Capital Group (HCG) announced it had cut ties with 45 mortgage brokers for falsifying figures on mortgage applications regarding the earnings of prospective home purchasers in Canada. The case details the subsequent investigation by the Ontario Securities Commission in 2017 that resulted in a run on the bank and consequent efforts by HCG to stay afloat. While emphasizing the importance of strong corporate governance and corporate social responsibility initiatives, this case also stresses the influence of various stakeholders including short‐sellers, regulators, shareholders, management, depositors, and customers in the evolution of subsequent events. As a whole, this case provides an interesting context for the discussion of stock market efficiency.     

Identifying Discretionary Fiscal Policy Reactions with Real‐Time Data

We propose a method of identifying discretionary fiscal policy reactions using real‐time data. Automatic stabilizers should depend on true GDP, while discretionary fiscal policy is contingent on the information that policy makers have in real time. We can compute a real‐time measurement error by comparing the first release of GDP data with later revisions. Discretionary fiscal policy is influenced by this measurement error, whereas automatic fiscal policy is not. We use this identification approach to test the central identifying assumption of Blanchard and Perotti’s (2002) seminal structural vector autoregression (VAR). According to this assumption, fiscal policy makers do not react to GDP developments contemporaneously in a discretionary fashion. We find that government expenditure is adjusted upward if GDP growth in real time is lower than true GDP. This suggests that fiscal policy makers use short‐term funds to buy goods and services in response to their perception of GDP dynamics.