Dynamic depositor discipline in US banks

Abstract

This paper investigates the presence of depositor discipline in the U.S. banking sector. We test whether depositors penalize (discipline) banks for poor performance by withdrawing their uninsured deposits. While focusing on the movements in uninsured deposits, we also account for the possibility that banks may be forced to pay a risk premium in the form of higher interest rates to induce depositors not to withdraw their uninsured deposits. Our results support the existence of depositor discipline: a weak bank may not necessarily be able to stop a deposit drain by raising its uninsured deposit interest rates.3

Bank Liability Structure, FDIC Loss, and Time to Failure: A Quantile Regression Approach

“…Thus, my study is also related to the literature on depositor discipline Hudgins 1996, 2002;Jordan 2000;Billet et al 1998;Park and Peristiani 1998;Maechler and McDill 2006;Davenport and McDill 2006) and depositor preference laws (Hirschhorn and Zervos 1990;Osterberg 1996). 1 Third, I investigate how liability composition affects the time to failure.…”

Depositors’ Response to Deposit Insurance Reforms: Evidence from Japan, 1990–2005

“…Park (1995) and Park and Peristiani (1998) show that riskier banks attract fewer deposits and pay higher interest rates on deposits. Hudgins (1996, 2002) and Maechler and McDill (2006) report that failing S&Ls attract fewer uninsured deposits than do solvent S&Ls. Gilbert and Vaughan (2001), however, find no evidence of depositor discipline.…”

The Depositor Behind the Discipline: A Micro-Level Case Study of Hamilton Bank

“…Hudgins (1996, 2002), for example, conclude that the share of uninsured deposits to total deposits declined for U.S. thrifts as the institutions approached failure. Maechler and McDill (2006) find that uninsured depositors penalize banks for poor performance. In an earlier study, McDill and Maechler (2003) find uninsured depositors of U.S. banks to be more responsive to bank conditions when banks have low equity.…”