Depositor Discipline Research Articles

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

AbstractIn emerging countries, deposits play an important role in banks' total funding; hence, depositor discipline may significantly impact banking performance and financial system stability. This paper investigates depositor discipline before and after Vietnam's 2008–2011 banking crisis when depositors had little experience regarding bank bailouts and the amount of deposit insurance was limited to a low cap. The study points out that before the crisis, the level of deposit financing in banks depended on both the interest rates offered and on measures of banks' risk‐taking. After the crisis, given that the Vietnamese government prevented all bank failures to ensure economic, political, and social stability, depositors still react to interest rate changes, but substantially less to risk. This suggests that they have learned that their deposits are safe regardless of the risk the bank is taking.

How Did Depositors React to Bank Risks During the Covid-19 Outbreak in Indonesia?

The Covid-19 outbreak provides a unique setting to examine the association between deposits and bank risk, including loan risk, as both deposits and loan risk increased significantly during the outbreak. Employing dynamic regression models in datasets from the Indonesian banking industry before and during the Covid-19 outbreak, this study provides new evidence that depositor discipline is stronger during the outbreak, as depositors are more sensitive to loan risk. The findings are different from prior studies in that depositor discipline tends to diminish during the crisis period. Furthermore, this study confirms the effectiveness of the deposit insurance system implementation, as uninsured depositors exercise stronger discipline. Last but not least, this study documents that depositor discipline is weaker in government banks as those banks are perceived as having implicit guarantees from the government.

Depositor discipline and the banking panic of 2023

Depositor discipline and the banking panic of 2023

Depositor discipline and the banking panic of 2023

Depositor discipline and the banking panic of 2023

Do depositors discipline the banking sector? Evidence from an emerging economy

PurposeMarket discipline is an important part of financial regulation, under Basel II and III. This paper aims to provide evidence on market discipline in Pakistan. Specifically, the authors have analyzed the impact of CAMEL variables on costs of funds and deposit switching.Design/methodology/approachThis study has used panel data related to different banking and macroeconomic variables. The sample period is 2004–2017 so it has covered the changing regulations that became binding for banks under Basel II and III. Quarterly data has been collected from the financial disclosure of publicly listed banks. The total number of banks in the sample is 26. Among these, 24 are publicly listed. Foreign banks have not been included because their activities in Pakistan are quite limited.FindingsIt has been found that efficiency, liquidity, asset quality and capital adequacy are negatively related to costs of funds for banks. Capital adequacy, liquidity and profitability are negatively related to deposit switching.Research limitations/implicationsThese results indicate the presence of market discipline and have generated valuable implications for bank managers and regulators.Originality/valueIn this study, the case of Pakistan is interesting. The country has experienced financial liberalization that sought to avoid government intervention and encourage a more “market-based” approach. This change in the system was made more pronounced by the privatization of nationalized banks, improvement in the market structure, reduction in barriers to entry and consolidation of smaller banks. As a result, the banking system has emerged as an important source of financing and it provides us motivation to look deeper into depositor discipline in banking sector.

The nexus of financial literacy and depositor discipline in commercial banks

PurposeThis study investigates the relationship between financial literacy, that is, financial knowledge and financial skills, and market discipline, with financial behavior as the mediating variable. The study uses data from Indonesian depositors in commercial banks to estimate the relationship between the variables.Design/methodology/approachThis study applied an explanatory method with a quantitative approach by surveying 343 Indonesian commercial bank depositors, in both public and private banks. The responses were collected using the purposive sampling technique. This study applied structural equation modeling (SEM) using AMOS software to analyze the data and then to estimate the relationships between financial literacy and market discipline.FindingsThis study shows that financial knowledge, financial skills, and financial behavior can improve market discipline. This study also provides empirical evidence that financial behavior has a mediation effect on the relationship between financial skills and financial knowledge to the market discipline.Research limitations/implicationsThe results show that all financial literacy latent variables have a significant positive effect on market discipline. Financial behavior has a mediation effect on the relationship of financial skills and financial knowledge with market discipline. Depositors with good knowledge of financial products and services, who are skillful in managing their money and who demonstrate good financial behavior can effectively discipline the market. They will punish imprudent banking by actions such as the withdrawal of their funds. Financial literacy significantly enhances market discipline.Practical implicationsThis study provides recommendations for regulators, practitioners, academics, and depositors, that is, the actors in the financial industry, on the need to empower consumers with financial literacy, while also promoting market discipline to recognize the importance of these two aspects for the sustainability of financial stability.Originality/valueThis study provides empirical evidence for the market discipline literature, using a behavioral approach, namely, the action of withdrawal of funds. The study then estimates the relationship between financial literacy, that is, financial knowledge and financial skills, and market discipline, with financial behavior as the mediating variable.

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

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

Drivers of depositor discipline in credit unions

AbstractIn this paper, we analyze whether credit unions are subject to market discipline by their (member) depositors and examine the drivers of such discipline. We first provide descriptive evidence of depositor discipline in credit unions: shares and deposits as well as savings interest rates react to variables that reflect the financial health of the credit union and its asset risk. We show that this discipline is long‐lasting and that it is mediated by the existence of a deposit guarantee scheme and by the strength of the relationship of members with the credit union. We then use proxies of the capability of members to process financial information to show that discipline is heavily influenced by member financial sophistication. Our results suggest that a type of market‐based discipline acts as a complement for regulation in controlling credit union risk taking, thus contributing to overall financial stability.

Depositor discipline, financial crisis and macroprudential policies

PurposeUsing bank-level data on MENA countries during 2000-2016, this study aims to examine the role and relevance of macroprudential policies in affecting depositor discipline.Design/methodology/approachThe author uses the dynamic panel data methodology as compared to alternate techniques, owing to the ability of this technique to effectively address the endogeneity problem of some of the independent variables.FindingsThe findings suggest that market discipline for MENA banks occurs primarily through deposit rates. During the crisis, depositors typically focus on a catch-all measure of bank performance. Second, macroprudential policies play a role in influencing market discipline. Third, the behavior of depositors in exercising market discipline is more pronounced in countries with high Islamic banking share and works mainly through the price channel.Originality/valueTo the best of author’s knowledge, this is one of the early studies for MENA countries to examine this issue in a systematic manner. By focusing on an extended sample of MENA country banks covering an extensive period that subsumes the global financial crisis, author’s analysis is able to shed light on the relevance of macroprudential policies in affecting depositor discipline.

Depositors’ discipline, banks’ accounting discretion, and depositors’ expectations of implicit government guarantees

In this study, we examine the depositors’ tendency to apply financial discipline to banks that adopt discretionary accounting practices. We use estimates of discretionary loan loss provisions (DLLP)—the difference between an observed provision and a model-determined, notionally correct provision—to quantify the extent to which banks are engaging in discretionary accounting practices. We examine whether depositors perceive that discretionary accounting practices increase credit risk and punish such practices by withdrawing deposits or requiring higher interest rates. We also examine whether depositors’ expectations of implicit government guarantee moderate this relationship by comparing the differences in depositors’ responses depending on whether a bank is large or small. Using US commercial bank data from 2001Q1 to 2010Q4, we find that uninsured deposit growth is negatively associated with banks’ DLLP. The findings suggest that depositors punish banks’ discretionary accounting practices. We also find that within the non-too-big-to-fail (non-TBTF) banks, depositors react sensitively to DLLP practices during both the crisis and non-crisis periods. However, for those too-big-to-fail (TBTF) banks, depositors react sensitively to DLLP practices only during the non-crisis period, but not during the crisis period. In addition, we find that banks subject to US government bailout actions during the 2008–2009 crisis period received less depositor discipline than other banks. In general, our findings suggest that the uninsured depositors’ discipline did exist during the pre-crisis period. Depositors punish banks for their behavior in increasing the information asymmetry between the banks and outsider creditors. However, policies such as rescuing big banks or increasing the deposit insurance coverage may reduce such market discipline.

Market monitoring and influence: evidence from deposit pricing and liability composition from 1986 to 2013

We examine the monitoring and ex-post influence of depositors on risk-taking of U.S. bank holding companies (BHCs) from September 1986 to December 2013. As the basis for our empirical analysis, we develop a theoretical model which shows that under risky lending and deposit insurance, a bank’s liability and asset choices are interrelated through its probability of insolvency. Our empirical results are as follows. First, for the sub-sample of the ten largest (Top10) BHCs, deposit risk pricing only exists over some sub-periods prior to the 2007 financial crisis. However, interest rates on insured deposits and uninsured deposits for the Non-Top10 BHCs increase with bank risk over the whole sample period. Moreover, the growth rates of insured and uninsured deposits tend to decrease as bank risk increases for Non-Top10 BHCs over the entire sample period, but only in some sub-periods for the Top10 institutions. Second, although Top10 BHCs do not increase the insured deposits-to-liabilities ratio to weaken market discipline over the entire sample period, all other institutions engage in such regulatory arbitrage in some sub-periods. Third, higher risk premium embedded in current deposit interest rates is more likely to reduce future insolvency risk of troubled BHCs. This suggests that depositors monitor the riskiness of BHCs while also exerting strong ex-post influence on risk-taking of problem institutions. Fourth, in the post-Dodd-Frank Act/Basel III period, the interest rates, the shares, and the growth rate of insured deposits for the Top10 BHCs are significantly negatively related to bank insolvency risk. This could be due to strengthened regulatory oversight on the largest high-risk institutions and is consistent with a substitution relationship between depositor discipline and regulatory oversight.

Depositor discipline during crisis: Flight to familiarity or trust in local authorities?

We analyze whether bank familiarity affects depositor behavior during financial crisis. Familiarity is measured by regional or local cues in the bank’s name. Depositor behavior is measured by the depositor’s sensitivity to observable bank risk (depositor discipline). Using 2001–2010 bank-level and region-level data for Russia, we find that depositors of familiar banks become less sensitive to bank risk during a financial crisis relative to depositors of unfamiliar banks. To validate that our results stem from a flight to familiarity during crisis and not from implicit guarantees from regional governments, we split our sample along the lines of regional affinity and trust in local governments. The flight to familiarity effect is strongly confirmed in the subsample of regions with strong regional affinity, while the effect is absent in the subsample of regions with more trust in regional and local governments, lending support to the thesis that our results are driven by a flight to familiarity rather than by implicit guarantees.

Depositor Discipline and Bank's Discretionary Behaviors

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.

Making Depositors Greedy and Careless: Government Safety Nets and the Degradation of Depositor Discipline

In emerging countries, deposits play an important role in banks’ total funding; hence depositor discipline may impact significantly banking performance and the financial system’s stability. My paper investigates the reaction of bank depositors to interest rates as well as signs of banks’ risk, before and after the recent banking crisis in Vietnam. I demonstrate that before the crisis, the level of deposit financing in banks depended on the interest rates offered, but also on measures of the banks' risk-taking. After the crisis, the second relationship wanes: Bank customers still react actively to interest rates but not to risk, presumably because they have learned that their deposits are safe, whatever risk the bank is taking.

상호저축은행 부실사태와 예금자규율에 관한 연구

상호저축은행 부실사태와 예금자규율에 관한 연구

Listening to the Buzz: Social Media Sentiment and Retail Depositors' Trust

We investigate the relationship between the rumours on Twitter regarding banks and deposits growth. The sentiment expressed in tweets is analysed and employed for the nowcasting of retail deposits. We show that a Twitter-based indicator of sentiment improves the predictions of a standard benchmark model of depositor discipline based on financial data. We further improve the power of the model introducing a Twitter-based indicator of perceived interconnection, that takes into account spillover effects across banks.

Depositor Discipline in Korean Savings Banks

Depositor Discipline in Korean Savings Banks

Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance

Using unique, daily, account-level balances data we investigate deposit stability and the drivers of deposit outflows and inflows in a distressed bank. We observe an outflow of uninsured depositors from the bank following bad regulatory news. We find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the outflow of deposits. We also characterize which accounts are more stable (e.g., checking accounts and older accounts). We further provide important new evidence that, simultaneous with the run-off, gross funding inflows are large and of first-order impact — a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely offset with new insured deposits as the bank approached failure. We show our results hold more generally using a large sample of banks that faced regulatory action. Our results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability, raising the importance of other mechanisms of restricting bank risk taking, including prudent supervision.

Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance

Using unique, daily, account-level balances data we investigate deposit stability and the drivers of deposit outflows and inflows in a distressed bank. We observe an outflow of uninsured depositors from the bank following bad regulatory news. We find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the outflow of deposits. We also characterize which accounts are more stable (e.g., checking accounts and older accounts). We further provide important new evidence that, simultaneous with the run-off, gross funding inflows are large and of first-order impact — a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely offset with new insured deposits as the bank approached failure. We show our results hold more generally using a large sample of banks that faced regulatory action. Our results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability, raising the importance of other mechanisms of restricting bank risk taking, including prudent supervision.

Depositor discipline for better or for worse. What enhanced depositors’ confidence on the banking system in the last ten years?

The aim of this paper is to verify the presence of depositor discipline and how it worked before, during and after the Global Financial Crisis. To that end we build up a model for testing whether depositors do discipline banks considering different degrees and measures of bank risk and changes in the features of deposit insurance schemes (DISs). To test our hypotheses, we gathered a sample of banks located in 22 OECD countries covering the period from 2005 to 2014.We found the presence of depositor discipline and also depositors’ moral hazard behaviours. The results suggest that depositor discipline worked differently through the periods analysed according to the relevant changes in the economic conditions. Moreover, the specific features of DISs did not influence depositor discipline before and during the crisis; conversely they have proven to be positively evaluated by depositors in the post-crisis period.