Uninsured Depositors, Commercial Lending, and the Regional Banking Crisis

Abstract

We develop an additional mechanism for the Regional Banking Crisis beyond uninsured depositors' concern about bank mismanagement of interest rate risk. High uninsured-deposit banks that experienced greater equity declines in March 2023 had beforehand less securities exposure but higher risk and exposure to commercial loans, lower default rates, and greater profits and valuations. We explain these facts by modeling how banks that are better at lending attract large uninsured depositors who are corporations with loan demand. Consistent with our model, the 2022 business downturn, coinciding with large interest-rate increases, reduced lending-relationship values and reallocated uninsured deposits before the bank run.

Keywords: Uninsured deposits, Regional Banks, SVB, Silicon Valley Bank, Commercial lending

JEL Classification: G01, G21