Are Risky Banks Disciplined by Large Corporate Depositors?

Abstract

AbstractWe analyze depositor discipline using auctions of unsecured money market deposits of firms to banks. In each auction, only the firm observes the banks and their interest rate bids. We observe that deposit interest rate bids increase with bank risk. Conditional on the same interest rate bid and firm–bank relationship, depositors select less risky banks. Banks reduce their risk after their deposit offers are less often selected. Risky banks eventually exit the market, and reenter when they become safer. This has important implications for banks’ access to unsecured corporate funding, financial stability, and our understanding of market discipline more broadly.