Do Depositors Monitor Banks?

36 Pages Posted: 18 May 2013

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Nicholas Ryan

Harvard Weatherhead Center

Date Written: May 2013

Abstract

We use unique micro-level depositor data for a bank that faced a run due to a shock to its solvency to study whether depositors monitor banks. Specifically, we examine depositor withdrawal patterns in response to a timeline of private and public signals of the bank's financial health. In response to a public announcement of the bank's financial troubles, we find depositors with uninsured balances, depositors with loan linkages and staff of the bank are far more likely to run. Even before the run, a regulatory audit, which was in principle private information, found the bank insolvent. We find that depositors act on this private information and withdraw in a pecking order beginning at the time of the regulatory audit, with staff moving first, followed by uninsured depositors and finally other depositors. By comparing the response to this fundamental shock with an earlier panic at the same bank, we argue that withdrawals in the fundamental run are due in part to monitoring by depositors though the monitoring appears to be more of regulatory signals rather than of fundamentals. Our results give sharp empirical evidence on the importance of fragility in a bank's capital structure and may inform banking regulation.

Suggested Citation

Iyer, Rajkamal and Puri, Manju and Ryan, Nicholas, Do Depositors Monitor Banks? (May 2013). NBER Working Paper No. w19050. Available at SSRN: https://ssrn.com/abstract=2266717

Rajkamal Iyer (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

Nicholas Ryan

Harvard Weatherhead Center ( email )

K239 1737 Cambridge St.
Cambridge, MA 02138
United States

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