The Fundamental Role of Uninsured Depositors in the Regional Banking Crisis

51 Pages Posted: 5 Jul 2023 Last revised: 25 Oct 2023

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Ing-Haw Cheng

University of Toronto - Rotman School of Management

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 21, 2023

Abstract

We examine the role of uninsured depositors in the 2023 Regional Banking Crisis by emphasizing that they are valuable clients who demand loans. Banks with more uninsured deposits experienced greater equity value declines and stock price risk after the start of 2022 when interest rates rose sharply. Before 2022, these banks also had greater stock price risk, profitability, valuations, executive pay, and exposure to commercial loans than other banks but had similar exposure to securities. To explain these facts, we develop a model where banks better at risk-taking attract large uninsured depositors who have loan demand. Rising interest rates and decreased loan demand reduce lending relationship values, leading to outflows from riskier banks.

Keywords: Uninsured deposits, Regional Banks

JEL Classification: G01, G21

Suggested Citation

Chang, Briana and Cheng, Ing-Haw and Hong, Harrison G., The Fundamental Role of Uninsured Depositors in the Regional Banking Crisis (October 21, 2023). Available at SSRN: https://ssrn.com/abstract=4497863 or http://dx.doi.org/10.2139/ssrn.4497863

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Ing-Haw Cheng (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://inghawcheng.github.io

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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