Dynamic Depositor Discipline in U.S. Banks

Maechler, Andrea; McDill, Kathleen

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Dynamic Depositor Discipline in U.S. Banks

IMF Working Paper No. 03/226

34 Pages Posted: 15 Feb 2006

See all articles by Andrea Maechler

Andrea Maechler

University of California, Santa Cruz - Department of Economics

Kathleen McDill

Federal Deposit Insurance Corporation (FDIC)

There are 2 versions of this paper

Date Written: November 2003

Abstract

This paper investigates the presence of depositor discipline in the U.S. banking sector. We test whether depositors penalize (discipline) banks for poor performance by withdrawing their uninsured deposits. While focusing on the movements in uninsured deposits, we also account for the possibility that banks may be forced to pay a risk premium in the form of higher interest rates to induce depositors not to withdraw their uninsured deposits. Our results support the existence of depositor discipline: a weak bank may not necessarily be able to stop a deposit drain by raising its uninsured deposit interest rates.

Keywords: Deposit Insurance Market Discipline Banking System

JEL Classification: G21 G28

Suggested Citation: Suggested Citation

Maechler, Andrea and McDill, Kathleen, Dynamic Depositor Discipline in U.S. Banks (November 2003). IMF Working Paper No. 03/226, Available at SSRN: https://ssrn.com/abstract=880921