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Deposit Withdrawals from Distressed Commercial Banks: The Importance of Switching Costs

Listed author(s):
  • Brown, Martin

    ()

  • Guin, Benjamin

    ()

  • Morkoetter, Stefan

    ()

We study retail deposit withdrawals from commercial banks which were differentially exposed to distress during the 2007-2009 financial crisis. We show that the propensity of households to withdraw deposits increases with the severity of bank distress. Withdrawal risk is, however, substantially mitigated by strong bank-client relationships. Considering the most distressed bank in our sample, 23 percent of its clients shifted deposits away from the bank during the crisis. Our estimates suggest that this withdrawal risk is eliminated if a client banked exclusively with this financial institution before the crisis, and is more than halved if the client had a mortgage with this bank. 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://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1319.pdf
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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: 75 pages
Date of creation: Nov 2013
Date of revision: Jun 2017
Handle: RePEc:usg:sfwpfi:2013:19
Contact details of provider: Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/universitaet/schools/finance

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