Supervisory Enforcement Actions and Depositors’ Reaction: Monitoring, Running, or Living a Quiet Life?

Abstract

Public announcement of formal enforcement actions against banks for safety and soundness reasons may enhance effective depositor monitoring or cause depositors to overreact, leading to disruptive runs. We test these competing hypotheses, using hand-collected data on enforcement actions and bank-quarter or branch-year data on deposits and other bank characteristics from 2000 through 2014. Our baseline results show that total deposits at punished banks decrease by 9.5% in the post-enforcement year, with uninsured deposits declining by 20% and insured deposits falling by 7.9%. These findings survive in a large battery of robustness tests and highlight that enforcement actions enhance rational depositor monitoring over and above punished banks’ financial condition.

Keywords: Enforcement actions, Bank deposits, Depositor monitoring

JEL Classification: G21, G28, G01