Depositor Discipline and Bank's Discretionary Behaviors

Abstract

Using a large panel of US bank holding companies from 2001 to 2015, this study investigate how depositors respond to the bank’s discretionary behaviors. We document evidence of a higher deposit rates for banks that engage more in earnings management, suggesting the evidence of market discipline. Depositors seem to monitor bank’s discretionary behaviors at a lesser extent during the crisis time, potentially due to the governement intervention, but they become more severe after the crisis. Interestingly, there is no evidence of depositors monitoring for large banks before and during crisis, suggesting the “too-big-to-fail” perception of depositors. However, this perception is wiped out after the crisis when we observe a stronger market discipline in large banks. The study also documents evidence of monitoring from insured depositors, but not uninsured depositors during the crisis, suggesting that the deposit insurance schemes are not always fully credible. After the crisis, insured depositors seem to increase more their monitoring than uninsured depositors. Our study is of interest to regulators and policymakers who are concerns of strengthening the market discipline.