Depositors Discipline through Interest Costs during Good and Bad Times: the Role of the Guarantor of Last Resort1

Abstract

We investigate whether the public sector's ability as the guarantor of last resort (GLR) to help banks or to guarantee banks' liabilities affects the sensitivity of interest costs to bank fundamentals. We use a global bank sample and find that the sensitivity is an increasing function of GLR risk, regardless of the method applied to describe this risk. Therefore, our results indicate that increased levels of GLR risk might foster market monitoring by depositors.

Making depositors greedy and careless: Government safety nets and the degradation of depositor discipline

“…Nevertheless, Jackowicz et al. (2018) find evidence that increased levels of the guarantor of last resort risk might foster market monitoring by depositors. Finally, there exists experimental evidence: Peia and Vranceanu (2019) demonstrate that noisy information on the number of depositors who run on a simulated bank combined with the uncertainty related to the size of the insurance fund exert a significant impact on the propensity to withdraw and result in a large number of bank runs.…”