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Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks

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  • Brown, Martin

    ()

  • Guin, Benjamin

    ()

  • Morkoetter, Stefan

    ()

Abstract

We 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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File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1319.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1319.

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Length: 45 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:usg:sfwpfi:2013:19

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Related research

Keywords: Liquidity Risk; Bank Run; Market Discipline; Deposit Insurance; Switching Costs;

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References

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Cited by:
  1. 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, Center of Excellence SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  2. 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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