Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance

We construct a model of a bank's optimal funding choice, where the bank negotiates with both safety-driven short-term bondholders and (mostly) risk-taking long-term bondholders. We establish that investor demands for safety create a negative relationship between the bank's capital choices and short-term funding, as well as negative relationships between capital and common measures of bank liquidity. Consistent with our model, our bank-level empirical analysis of these capital-liquidity tradeoffs show (1) that bank liquidity measures have a strong and negative relationship to its capital ratio for both large and small banks, and (2) that this relationship has weakened with the advent of stronger liquidity regulation. Our results suggest that the safety concerns of bank debt investors may underlie capital-liquidity tradeoffs and that a bank's share of collateralized short-term debt may be a more robust measure of bank liquidity.

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Investor Demands for Safety, Bank Capital, and Liquidity Measurement

Passmore

Temesváry

2020

FEDS

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Shadow Banking and Canada’s Monetary Policy

Kronick¹,

2019

SSRN Journal

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Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance

Cited by 2 publications

References 22 publications

Investor Demands for Safety, Bank Capital, and Liquidity Measurement

Investor Demands for Safety, Bank Capital, and Liquidity Measurement

Shadow Banking and Canada’s Monetary Policy

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