Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks
AbstractWe study deposit withdrawals by retail customers of two large Swiss banks after these banks incurred substantial investment losses in the wake of the U.S. subprime crisis. Our analysis is based on survey data providing information on all bank relations of 1,475 households and documenting their reallocation of deposits in 2008-2009. We find that households are 16 percentage points more likely to withdraw deposits from a distressed bank than from a nondistressed bank. The propensity to withdraw deposits from a distressed bank is substantially reduced by household-level switching costs: Households which rely on a single deposit account, which do not live close to a non-distressed bank, or which maintain a credit relationship with the distressed bank, are significantly less likely to withdraw deposits. By contrast, we find that the withdrawal of deposits from distressed banks is unrelated to household coverage by deposit insurance. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.
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Bibliographic InfoPaper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1319.
Length: 45 pages
Date of creation: Nov 2013
Date of revision:
Liquidity Risk; Bank Run; Market Discipline; Deposit Insurance; Switching Costs;
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-29 (All new papers)
- NEP-BAN-2013-11-29 (Banking)
- NEP-CBA-2013-11-29 (Central Banking)
- NEP-IAS-2013-11-29 (Insurance Economics)
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