Supply and Demand Effects of Bank Bailouts: Depositors Need Not Apply and Need Not Run

Abstract

We address two key issues concerning bank bailout effects on depositor and bank behavior. The first is whether bailouts weaken or strengthen market discipline by depositors through deposit supplies. The second is if bailed-out banks decrease or increase their deposit demands. These questions can only be adequately addressed by analyzing the effects of bailouts on both deposit quantities and prices. We do so for the Troubled Asset Relief Program (TARP) bailouts. Overall, we find demand changes empirically dominate supply changes, and suggest significantly reduced deposit demand from bailouts. In some cases, however supply changes dominate, and indicate weakened market discipline.

Keywords: Bailouts, Financial Crises, Global Financial Crisis, Market Discipline, Depositor Behavior, Bank Runs, Bank Deposit Funding.

JEL Classification: G01; G18; G14; G21; H81.