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Unexpected Effects of Bank Bailouts: Depositors Need Not Apply and Need Not Run

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  • Allen N. Berger
  • Martien Lamers
  • Raluca Roman
  • Koen Schoors

Abstract

A key policy issue is whether bank bailouts weaken or strengthen market discipline. We address this by analyzing how bank bailouts influence deposit quantities and prices of recipients versus other banks. Using the Troubled Asset Relief Program (TARP) bailouts, we find both deposit quantities and prices decline, consistent with substantially reduced demand for deposits by bailed-out banks that dominate market discipline supply effects. Main findings are robust to numerous checks and endogeneity tests. However, diving deeper into depositor heterogeneity suggests nuances. Increases in uninsured deposits, transactions deposits, and deposits in banks that repaid bailout funds early suggest some temporary limited support for weakened market discipline.

Suggested Citation

  • Allen N. Berger & Martien Lamers & Raluca Roman & Koen Schoors, 2020. "Unexpected Effects of Bank Bailouts: Depositors Need Not Apply and Need Not Run," Working Papers 21-10, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:90126
    DOI: 10.21799/frbp.wp.2021.10
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    More about this item

    Keywords

    Bailouts; Banking; Depositor Behavior; Market Discipline; Bank Runs;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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