Hidden Cost of Better Bank Services: Carefree Depositors in Riskier Banks?

61 Pages Posted: 20 Jan 2016 Last revised: 14 Jun 2018

See all articles by Dong Beom Choi

Dong Beom Choi

Seoul National University - Business School

Ulysses Velasquez

Stanford Graduate School of Business

Date Written: June 1, 2018

Abstract

Better customer service helps banks attract core deposits and increase funding stickiness by raising depositors’ switching costs and enhancing their loyalty. This funding stickiness, however, could impair market discipline and lead to excessive risk-taking. We find that banks providing better services attract more core deposits, pay less for their funding, and are exposed to lower funding outflow risks. At the same time, these banks carry lower quality loans. We argue that this contradictory finding of cheaper funding cost with lower asset quality stems from the lack of risk monitoring by loyal, sticky depositors, which exacerbates agency problems.

Keywords: bank liability, funding cost, deposit, risk taking, market discipline

JEL Classification: G20, G21

Suggested Citation

Choi, Dong Beom and Velasquez, Ulysses, Hidden Cost of Better Bank Services: Carefree Depositors in Riskier Banks? (June 1, 2018). FRB of NY Staff Report No. 760, Available at SSRN: https://ssrn.com/abstract=2718867

Dong Beom Choi (Contact Author)

Seoul National University - Business School ( email )

Seoul
Korea, Republic of (South Korea)

Ulysses Velasquez

Stanford Graduate School of Business

655 Knight Way
Stanford, CA 94305-5015
United States

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