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Do depositors discipline banks? an international perspective

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  • Allen N. Berger
  • Rima Turk-Ariss

Abstract

The recent financial crisis highlights the importance of both regulatory and market discipline. Government reactions to the crisis include expanding deposit insurance coverage and rescuing troubled institutions, including some that might not otherwise be considered too big to fail, which may have the unintended consequence of a reduction in depositor discipline that might otherwise penalize banks for risk-taking behavior. To examine the potential for this to occur, we test for the presence of depositor discipline effects in the period leading up to the financial crisis in both the US and the EU. We find significant depositor discipline in both the US and EU, but this varies between the US and the EU, and also varies with banking organization size and with listed versus unlisted status. We also find that depositors appear to react more consistently to equity ratios than measures of loan portfolio performance, the latter of which may sometimes considered too manipulable to be trusted. This is consistent also with the requirements of Basel III that increase the minimum amount of Tier 1 common equity.
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Suggested Citation

  • Allen N. Berger & Rima Turk-Ariss, 2011. "Do depositors discipline banks? an international perspective," Proceedings 1121, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhpr:1121
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    Cited by:

    1. Krzysztof Jackowicz & Oskar Kowalewski & Łukasz Kozłowski, 2018. "Depositors Discipline through Interest Costs during Good and Bad Times: the Role of the Guarantor of Last Resort1," Journal of Financial Services Research, Springer;Western Finance Association, vol. 54(2), pages 179-205, October.
    2. Barajas, Adolfo & Catalán, Mario, 2015. "Market discipline and conflicts of interest between banks and pension funds," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 411-440.
    3. Jonathan D. Rose, 2015. "Old-Fashioned Deposit Runs," Finance and Economics Discussion Series 2015-111, Board of Governors of the Federal Reserve System (U.S.).
    4. Lukasz Kozlowski, 2018. "The Halo Effect in Banking: Evidence from Local Markets," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(5), pages 416-441, October.
    5. Mr. Adolfo Barajas & Mr. Mario Catalan, 2011. "Market Discipline and Conflicts of Interest Between Banks and Pension Funds," IMF Working Papers 2011/282, International Monetary Fund.
    6. Pierluigi Bologna, 2015. "Structural Funding and Bank Failures," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(1), pages 81-113, February.
    7. Pierluigi Bologna, 2011. "Is there a role for funding in explaining recent US bank failures?," Questioni di Economia e Finanza (Occasional Papers) 103, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Bank deposits; Financial institutions - Law and legislation; Financial crises;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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