Discussion Paper
Depositor Discipline of Risk-Taking by U.S. Banks
Abstract: The recent financial crisis caused the largest rise in the number of bank failures since the unprecedented banking crisis of the 1980s and early 1990s. This post examines how depositors responded to the amplified risks of bank failure over the last three decades. We show that uninsured depositors discipline troubled banks by withdrawing their funds. Focusing on the recent financial crisis, we find that banks experienced an outflow of uninsured time deposits after the near-failure of Bear Stearns and bankruptcy of Lehman Brothers. This depositor risk sensitivity subsided after the Federal Deposit Insurance Corporation (FDIC) introduced the Transaction Guarantee Account program in October 2008, which raised the maximum deposit insurance limit from $100,000 to $250,000.
Keywords: financial crisis; bank failures; Market discipline;
JEL Classification: G2;
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Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2014-04-14
Number: 20140414a