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Depositor discipline at failing banks

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Author Info
John S. Jordan
Abstract

Uninsured depositors, whose deposits are not fully protected by federal deposit insurance, have an incentive to monitor banks' activities and impose additional funding costs on risky banks. This pricing is a form of market discipline, since the market penalizes banks for taking on greater risk. For banks that become troubled, market discipline can take a more severe form: Market participants may become unwilling to supply uninsured funds at any reasonable price. This study examines the effectiveness of depositor discipline at banks that failed in New England in the early 1990s. ; The empirical analysis examines whether failing banks in New England faced depositor discipline as they became troubled in the early 1990s, and whether these banks attempted to shield themselves from this discipline. Failing banks in New England experienced a 70 percent decline in their uninsured deposits in their final two years of operation. The author finds that despite the magnitude of the gap to fill, and despite the presence of close regulatory scrutiny, many failing banks increased their use of insured deposits enough to offset much of the shortfall created by the decline in uninsured deposits, diminishing the effectiveness of market discipline by depositors.

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Publisher Info
Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2000)
Issue (Month): Mar ()
Pages: 15-28
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Handle: RePEc:fip:fedbne:y:2000:i:mar:p:15-28

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Related research
Keywords: Bank failures ; New England ; Federal Deposit Insurance Corporation;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. John Jordan & Jane Katz, 1999. "Banking in the age of information technology," Regional Review, Federal Reserve Bank of Boston, issue Q4, pages 24-30. [Downloadable!]
  2. Benston, George J & Kaufman, George G, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-58, Summer. [Downloadable!] (restricted)
  3. Flannery, Mark J, 1982. "Retail Bank Deposits as Quasi-Fixed Factors of Production," American Economic Review, American Economic Association, vol. 72(3), pages 527-36, June. [Downloadable!] (restricted)
  4. Herbert Baer & Elijah Brewer, 1986. "Uninsured deposits as a source of market discipline: some new evidence," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 23-31. [Downloadable!]
  5. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-11, May. [Downloadable!] (restricted)
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  6. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Juha-Pekka Niinimäki, 2003. "Fairly Priced Deposit Insurance under Adverse Selection," Finnish Economic Papers, Finnish Economic Association, vol. 16(1), pages 38-48, Spring. [Downloadable!]
  2. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market," Supervisory Policy Analysis Working Papers 2002-04, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. Mark Spiegel & Nobuyoshi Yamori, 2004. "Market price accounting and depositor discipline in Japanese regional banks," Pacific Basin Working Paper Series 2004-27, Federal Reserve Bank of San Francisco. [Downloadable!]
  4. Andrew Davenport & Kathleen McDill, 2006. "The Depositor Behind the Discipline: A Micro-Level Case Study of Hamilton Bank," Journal of Financial Services Research, Springer, vol. 30(1), pages 93-109, August. [Downloadable!] (restricted)
  5. Abhiman Das & Saibal Ghosh, 2004. "Market Discipline In The Indian Banking Sector: An Empirical Exploration," Finance 0410020, EconWPA. [Downloadable!]
  6. Andrea M. Maechler & Kathleen McDill, 2003. "Dynamic Depositor Discipline in U.S. Banks," IMF Working Papers 03/226, International Monetary Fund. [Downloadable!]
  7. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2006. "Can feedback from the jumbo CD market improve bank surveillance?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 135-175. [Downloadable!]
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