Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk

72 Pages Posted: 21 Feb 2017  

Daniel Friedmann

Goethe University Frankfurt

Björn Imbierowicz

Copenhagen Business School

Anthony Saunders

New York University - Leonard N. Stern School of Business

Sascha Steffen

University of Mannheim - Business School; Centre for European Economic Research (ZEW)

Date Written: February 21, 2017

Abstract

We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.

Keywords: Auctions, Corporate Deposits, Financial Crisis, Banking Crisis, Relationship

JEL Classification: D44, G01, G21, G32, L14

Suggested Citation

Friedmann, Daniel and Imbierowicz, Björn and Saunders, Anthony and Steffen, Sascha, Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk (February 21, 2017). Available at SSRN: https://ssrn.com/abstract=2921091

Daniel Friedmann

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Björn Imbierowicz (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+4538153736 (Phone)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Sascha Steffen

University of Mannheim - Business School ( email )

L9, 1-2
Mannheim, 68131
Germany

HOME PAGE: http://www.sascha-steffen.de

Centre for European Economic Research (ZEW) ( email )

L7, 1
Mannheim, 68161
Germany
+496211235140 (Phone)

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