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Do Depositors Monitor Banks?

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  • Rajkamal Iyer
  • Manju Puri
  • Nicholas Ryan
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    Abstract

    We use unique micro-level depositor data for a bank that faced a run due to a shock to its solvency to study whether depositors monitor banks. Specifically, we examine depositor withdrawal patterns in response to a timeline of private and public signals of the bank’s financial health. In response to a public announcement of the bank’s financial troubles, we find depositors with uninsured balances, depositors with loan linkages and staff of the bank are far more likely to run. Even before the run, a regulatory audit, which was in principle private information, found the bank insolvent. We find that depositors act on this private information and withdraw in a pecking order beginning at the time of the regulatory audit, with staff moving first, followed by uninsured depositors and finally other depositors. By comparing the response to this fundamental shock with an earlier panic at the same bank, we argue that withdrawals in the fundamental run are due in part to monitoring by depositors though the monitoring appears to be more of regulatory signals rather than of fundamentals. Our results give sharp empirical evidence on the importance of fragility in a bank’s capital structure and may inform banking regulation.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19050.

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    Date of creation: May 2013
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    Handle: RePEc:nbr:nberwo:19050

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    References

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    1. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1687, C.E.P.R. Discussion Papers.
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    3. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1521-1534, December.
    4. Merton, Robert C, 1978. "On the Cost of Deposit Insurance When There Are Surveillance Costs," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 51(3), pages 439-52, July.
    5. Gary Gorton & Andrew Metrick, 2012. "Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 50(1), pages 128-50, March.
    6. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2007. "Dynamic Global Games of Regime Change: Learning, Multiplicity, and the Timing of Attacks," Econometrica, Econometric Society, Econometric Society, vol. 75(3), pages 711-756, 05.
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    8. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Banks and Liquidity," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 422-425, May.
    9. Andrew Davenport & Kathleen McDill, 2006. "The Depositor Behind the Discipline: A Micro-Level Case Study of Hamilton Bank," Journal of Financial Services Research, Springer, Springer, vol. 30(1), pages 93-109, August.
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    11. Goldberg, Lawrence G. & Hudgins, Sylvia C., 1996. "Response of uninsured depositors to impending S&L failures: Evidence of depositor discipline," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 36(3), pages 311-325.
    12. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
    13. Saunders, Anthony & Wilson, Berry, 1996. "Contagious Bank Runs: Evidence from the 1929-1933 Period," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 5(4), pages 409-423, October.
    14. Charles W. Calomiris & Joseph R. Mason, 2003. "Consequences of Bank Distress During the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 937-947, June.
    15. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, American Economic Association, vol. 81(3), pages 497-513, June.
    16. Rajkamal Iyer & Manju Puri, 2012. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," American Economic Review, American Economic Association, American Economic Association, vol. 102(4), pages 1414-45, June.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Insider bank runs
      by Economic Logician in Economic Logic on 2013-06-25 14:42:00
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    Cited by:
    1. Brown, Martin & Guin, Benjamin & Morkoetter, Stefan, 2013. "Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks," Working Papers on Finance, University of St. Gallen, School of Finance 1319, University of St. Gallen, School of Finance.
    2. Lambert, Claudia & Noth, Felix & Schüwer, Ulrich, 2013. "How do insured deposits affect bank risk? Evidence from the 2008 emergency economic stabilization act," SAFE Working Paper Series 38, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    3. Claudia Lambert & Felix Noth & Ulrich Schüwer, 2013. "How Do Insured Deposits Affect Bank Risk?: Evidence from the 2008 Emergency Economic Stabilization Act," Discussion Papers of DIW Berlin 1347, DIW Berlin, German Institute for Economic Research.

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