How Did Depositors React to the Recent Crisis? Evidence from the Central European Banking Industry

Abstract

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in worse financial conditions than their subsidiaries. This situation created a unique opportunity to study new aspects of depositor discipline. In this article, we investigate whether depositors flexibly accommodated to the changing sources of risk. We also analyse the informational foundations of depositors’ decisions. Using a comprehensive data set, we find that in Central European countries, the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. Additionally, we establish that depositors’ actions are much more strongly influenced by press rumours concerning parent companies than by fundamentals and that public aid announcements are interpreted primarily as confirmation of a parent company’s financial distress. Our results have policy implications and illustrate the importance of reputational capital during periods of crisis.