Are risky banks disciplined by large corporate depositors?
48 Pages Posted: 1 Mar 2021 Last revised: 15 Dec 2021
Date Written: December 14, 2021
We analyze auctions of unsecured money market deposits of firms to banks using unique micro-level data from a FinTech platform. In each auction, only the firm observes the banks and their interest rate bids and decides where to deposit its funds. We observe that deposit interest rate bids increase monotonically with bank risk and that firms in general prefer higher deposit interest rates. However, our results show that firms’ selection of banks in which to deposit is concave in the bid interest rate, on the intensive as well as on the extensive margin. Risky banks eventually exit the market, and re-enter when they become safer. Risky banks exit when the interest rate they have to bid increases above central bank policy rates suggesting that central bank funding crowds out deposits thereby reducing monitoring by short-term creditors. This has important implications for banks’ access to unsecured corporate funding, financial stability and our understanding of market discipline more broadly.
Keywords: Auctions, Banks, Corporate deposits, Market discipline, Monetary policy
JEL Classification: D44, D45, G21, G32
Suggested Citation: Suggested Citation