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Deposit Withdrawals from Distressed Banks: Client Relationships Matter

76 Pages Posted: 14 Nov 2013 Last revised: 23 Aug 2017

Martin Brown

University of St. Gallen - Swiss Institute of Banking and Finance

Benjamin Guin

Bank of England

Stefan Morkoetter

University of St. Gallen - School of Finance

Date Written: August 1, 2017

Abstract

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.

Keywords: Liquidity Risk, Relationship Banking, Market Discipline

JEL Classification: D14, G21, G28

Suggested Citation

Brown, Martin and Guin, Benjamin and Morkoetter, Stefan, Deposit Withdrawals from Distressed Banks: Client Relationships Matter (August 1, 2017). University of St. Gallen, School of Finance Research Paper No. 2013-19. Available at SSRN: https://ssrn.com/abstract=2354197 or http://dx.doi.org/10.2139/ssrn.2354197

Martin Brown (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Benjamin Guin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Stefan Morkoetter

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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