Do Depositors Discipline Banks and Did Government Actions
During the Recent Crisis Reduce this Discipline?
An International Perspective
Allen N. Berger
University of South Carolina
Wharton Financial Institutions Center
CentER – Tilburg University
aberger@moore.sc.edu
Rima Turk-Ariss
Lebanese American University
rima.turk@lau.edu.lb
May 2014
The recent financial crisis highlights the importance of both regulatory and market discipline.
Government reactions to the crisis included expanding deposit insurance coverage and rescuing
troubled institutions, including some institutions that might not otherwise be considered too
important to fail. These actions may have the unintended consequence of a reduction in market
discipline that might otherwise penalize banks for risk-taking behavior. Alternatively, market
discipline may have increased during the crisis due to heightened awareness of the risks of bank
failures. To address these issues, we first test for the presence of depositor discipline effects in
the period leading up to the financial crisis in both the US and the EU. Second, we test whether
depositor discipline decreased or increased during the crisis. We find significant depositor
discipline prior to the crisis in both the US and EU, but this varies between the US and the EU as
well as with banking organization size and with listed versus unlisted status. We also find that
depositor discipline mostly decreased during the crisis, except for the case of small US banks.
JEL Classification Numbers: G21, G28
Keywords: Market Discipline, Depositor Discipline, Banks
The authors thank an anonymous referee, Rob Bliss, Arnoud Boot, Bob Collender, Bob
DeYoung, Astrid Dick, Stefano Giglio, John Goodell, Ed Kane, Mark Flannery, Phil Molyneux,
Herman Saheruddin, Klaus Schaeck, Greg Udell, Larry Wall, Maxim Zagonov, participants at
the Federal Reserve Bank of Chicago conference on Bank Structure and Competition, seminar
participants at the Money and Capital Markets department of the International Monetary Fund,
and participants at the Financial Management Association meeting for helpful comments and
suggestions, and Raluca Roman for outstanding research assistance.
Please address correspondence to Allen N. Berger, Moore School of Business, University of
South Carolina, 1705 College Street, Columbia, SC 29208. Phone: 803-576-8440, Fax: 803-7776876, email aberger@moore.sc.edu.
I - INTRODUCTION
The recent financial crisis highlights the importance of both regulatory and market
discipline of financial institutions, which seem to have been lacking in some cases.
The
government rescue actions for troubled financial institutions included increased deposit
insurance coverage (e.g., FDIC, Dodd-Frank),1 capital injections (e.g., TARP), government
takeovers of financial institutions (e.g., AIG, Northern Rock), increased central bank lending
(e.g., Term Auction Facility (TAF)), expanded discount window lending authority under Federal
Reserve 13(3)), more explicit too-important-to-fail protection of large financial institutions (e.g.,
Supervisory Capital Assessment Program (SCAP)),2 and the explicit or implicit guarantees in
many countries to all deposits. The goals included reducing panic and the potential for runs and
other short-term disruptions, but a potential unintended consequence may be a reduction in
market discipline that might otherwise penalize financial institutions for excessive risk-taking
behavior. However, potentially offsetting or even overwhelming this effect may be an increase
in market discipline due to heighted public awareness of bank risks because of the dramatic
increase in the numbers of failures and near-failures and the media coverage of them.
We examine an potentially important source of market discipline in this study – depositor
discipline. We address two issues. First, we test for the presence of depositor discipline effects
in the period leading up to the financial crisis in both the US and the EU (plus Switzerland).
Second, we test whether this discipline decreased or increased during the crisis. Specifically, for
1
In the US, the deposit insurance cap on the dollar amount of funds insured was temporarily raised from $100,000
to $250,000, and this was made permanent by Dodd-Frank. In the EU, moves were made to eliminate co-insurance
and raise the deposit insurance coverage caps. See Carbo-Valverde, Kane, and Rodriguez-Fernandez (2008) for
more general discussion of deposit insurance and the government safety net in the EU prior to the recent crisis.
2
Under the 2009 US bank stress tests, the Supervisory Capital Assessment Program (SCAP), the government may
have effectively announced that the 19 largest banking organizations were too important to fail by stating that these
institutions would need sufficient capital to survive another downturn or would be provided with such capital.
1
the pre-crisis period, we examine the effects of measures of bank risk on deposit growth for over
2000 commercial banks and bank holding companies over the period 1997-2007.
expositional convenience, we refer to both organizational types as “banks.”
For
We include
institutions from the US and 21 EU nations plus Switzerland. We refer to banks in the EU, but
this should be taken to include Swiss banks as well. We include Swiss banks in order to have
coverage of virtually all of the large banking organizations in Europe. To test whether depositor
discipline decreased or increased during the recent crisis, we repeat the analysis for the period
2008-2009, and test whether depositor discipline changed from the pre-crisis period to the crisis
period. The change should reflect net effect of any decrease in depositor discipline due to
government actions and any increase due to the public’s heightened awareness of risk during the
crisis. For our main results, we include insured and uninsured deposits together because of the
difficulty of separating them. For the US, we include an extra analysis of uninsured deposits.
We conduct tests separately on institutions above and below the top 10th percentile of
total banking assets in each country, on banks in the US and EU, and on listed versus unlisted
banking organizations.3
We regress measures of deposit growth rates on measures of bank risk, controls for bank
and country characteristics, and the lagged deposit rate premium (the difference between deposit
rate and the short-term Treasury rate). The inclusion of the lagged deposit rate premium takes
into account that deposit growth rates may be jointly determined with rate premia.
We
acknowledge the fact that we have not been able to completely rule out causality issues because
both deposit growth and risk may be reflections of a broader strategy. 4 In the robustness section,
3
Reasons for these separate treatments are given in the text below.
We also assume that the supply function of deposits does not significantly vary with other factors such as monetary
policy changes.
4
2
we additionally try dropping the deposit rate premium, and also run a dynamic model. In both
cases, the main results are robust.
In the literature, there are a number of tests for depositor discipline in the US, but there is
much less information available about the effects in the EU, and very few international
comparisons. As well, there are no tests to our knowledge about the effects of bank size, listed
versus unlisted status, or comparisons of different indicators of financial condition.
Most
important, we are unaware of studies that test whether market discipline decreased or increased
during the recent crisis.
By way of preview, we find significant depositor discipline in both the US and EU prior
to the crisis, but generally that the effects were stronger at large banks in the US than in the EU,
consistent with the conjecture that government bailouts of large organizations were considered
more likely in the EU. Depositor discipline was more economically significant for large US
institutions than for small US institutions, presumably due to either the greater preponderance of
uninsured deposits or more sophisticated depositors in large institutions. We also find less
measured discipline for large, listed institutions, which may be because depositor discipline is
based on variables other than equity ratios and loan performance that are not highly correlated
with these measures. Depositor discipline effects were in most cases reduced during the crisis,
consistent with the hypothesis that government actions taken at the beginning of the crisis reduce
such discipline.
An exception is small US banks, where depositor discipline held or was
increased, consistent with a heightened awareness of bank risk due to the numbers of small US
banks that failed, although other explanations are also possible.
3
The rest of the paper is organized as follows. Section II reviews the prior literature on
market discipline of different types of debt – subordinated debt and deposits. Section III
introduces the data and methodology. Section IV discusses the main empirical findings. Section
V conducts robustness tests, and Section VI presents the results of tests on uninsured deposits in
the US. Section VII concludes.
II - LITERATURE REVIEW ON MARKET DISCIPLINE
The literature on market discipline of banking organizations primarily focuses on
subordinated debt and depositor discipline.5 We review these in order.
A. SUBORDINATED DEBT LITERATURE
In an investigation of the market disciplining effect at US bank holding companies, Bliss
and Flannery (2002) note that effective market discipline involves two distinct components: the
ability of investors to evaluate a firm’s financial position, and to produce or trigger change at the
bank management level. The authors investigate the market disciplining effect of shareholders
and subordinated bondholders by examining their monitoring and influencing power at US bank
holding companies. While they find evidence about substantial monitoring effects, market
signals are not sufficient to influence managerial actions.
Flannery and Sorescu (1996) investigate the market’s ability to recognize default risk in
subordinated debentures and reject the null hypothesis that investors cannot differentiate among
the risks of US banking institutions. Flannery (1998) argues that while government regulation is
5
Some studies have also examined interbank market discipline. Furfine (2001) investigates the disciplining effects
of the overnight federal funds market and finds that interest rates are dependent on the credit risk of the borrowers.
King (2008) uses 20 years of panel data to provide evidence on interbank money market discipline, whereby banks
with high credit risk have consistently paid higher rates on interbank loans compared to low risk banks. Similar
discipline may be affected by counterparties to off-balance sheet activities. One study finds evidence of market
discipline in the standby letter of credit market (Koppenhaver and Stover, 1994),
4
likely to displace private efforts to evaluate banks, market investors and analysts may improve
banks’ corporate governance mechanisms.6 Jagtiani, Kaufman, and Lemieux (2000) also find
evidence of credit risk pricing in bank and bank holding company debt, and argue that requiring
banks to issue subordinated debt is likely to reveal additional information about the financial
condition of the issuer and to supplement prudential regulatory discipline. DeYoung, Flannery,
Lang, and Sorescu (2001) use supervisory CAMEL ratings and find that examiners have private
information that is not captured in contemporaneous bond yields, but is reflected in bond yields
one or two quarters later, suggesting a positive market reaction to supervisory recognition of
developing problems. Kwast, Covitz, Hancock, Houpt, Adkins, Barger, Bouchard, Connolly,
Bradly, English, Evanoff, and Wall (1999) and Evanoff and Wall (2000) summarize arguments
in favor of mandatory subordinated debt, including the sending of important signals for
supervisory discipline, and address some potential criticisms by presenting a proposal for the use
of subordinated debt in bank capital regulation. Evanoff and Wall (2001, 2002) attempt to
predict supervisor ratings of CAMELS by considering subordinated debt yields; however, results
show that subordinated debt signals can be noisy, leading to many misclassifications. Litan
(2000) suggests linking subordinated debt with prompt corrective action. Evanoff and Wall
(2002) conclude that a mandatory subordinated debt requirement would be a useful source of
indirect discipline, but they do not favor subordinated debt signals as prompt corrective action
triggers. Flannery (2005) argues that the inclination of supervisors to help large distressed banks
mitigates investors’ incentives to discipline these firms, and proposes “Reverse convertible
debentures” as a transparent un-levering mechanism.
6
Blum (2002), however, argues that
Similarly, Cole and Gunther (1998) find that off-site monitoring is more accurate in predicting bank survivability
than two-quarter old supervisory CAMEL ratings. Berger, Davies, and Flannery (2000) also report that, except for
recent bank examinations and inspections, bond and equity markets are more accurate in predicting bank
performance than supervisory assessments.
5
subordinated debt results in greater market discipline only if banks can credibly commit to a
certain level of risk. Since banks have an incentive to increase risk taking after contracting the
interest rate on the debt, the author demonstrates that subordinated debt may have an ambiguous
impact on risk-taking incentives. Balasubramnian and Cyree (2011) argue that the reduction in
the risk sensitivity of yield spreads on bank subordinated debt can be explained by the market’s
increased perception that large issuers will be bailed out by the government and because banks
started selling a new class of trust-preferred securities that is junior to subordinate debt. Evanoff,
Jagtiani, and Nakata (2011) state that failure of some researchers to find a significant relation
between yield and risk is due to lack of secondary market liquidity and they use the yields on
bank subordinated debt at time of issue when the bonds are most liquid and show that
subordinated debt yields do reflect bank risk. Acharya, Anginer, and Warburton (2013) suggest
that market discipline effectiveness may vary across different institution sizes. They find that
while credit spreads are risk sensitive for most financial institutions, credit spreads lack risk
sensitivity for the largest financial institutions because bondholders of large financial institutions
have an expectation that the government will shield them from losses.
Other papers investigate the market disciplining effects of subordinated debt in Europe.
Sironi (2003) examines whether private investors can differentiate among the risks taken by
banks by examining the variability of spreads of subordinated debt. His results indicate that
investors do impose market discipline on European banks and that the sensitiveness of bond
spreads to bank risk taking has increased as too-big-to-fail guarantees had lessened as of that
time. Pop (2006) confirms this result for European, North American, and Japanese banks.
Gropp, Vesala, and Vulpes (2006) find that combining the subordinated debt yield spreads, the
distance-to-default (DD) measure developed by the KMV Corporation, and a third measure
6
based on accounting information can increase the accuracy of predicting “serious weakening” of
a bank’s financial condition by 85 percent. Iannotta (2006) tests for the opaqueness of the
European banking industry and reports that ratings agencies are likely to disagree on the
riskiness of subordinated debt. He also finds that bank opaqueness increases (decreases) with a
larger fraction of financial (physical) assets.7
B. DEPOSIT LITERATURE
Deposits represent the bulk of funding for most banks. It is argued that relying on
deposits can have costly consequences in terms of asset-liability mismatches and bank runs,
causing banks to hold unproductive reserves (Diamond and Dybvig, 1983).
In contrast,
Calomiris and Kahn (1991) view demandable deposits as a means for monitoring bankers’
behavior and debt is considered as an incentive arrangement to promote good behavior by
bankers. Similarly, Diamond and Rajan (2001) also emphasize the governance advantages of
demandable debt. Flannery (1994) also argues that bank deposits produce a disciplining effect
on bank managers to prevent them from undertaking risky investment strategies and
expropriating creditors’ wealth.
It is commonly believed that deposit insurance distorts depositors’ incentives to monitor
banks. A few studies have investigated the market discipline of insured deposits, arguing that
insured depositors may not perceive their deposits as being perfectly safe and that they may also
be concerned about the solvency of banks. Flannery (1998) contends that depositors are not only
concerned about the solvency of banks, but also about the solvency of the insurer and the
willingness of the government to support it. Cook and Spellman (1994) report that rates on small
7
Bank opaqueness in the context of the US is also noted by Morgan (2002), who examines the pattern of
disagreement between rating agencies when rating banks.
7
Certificates of Deposits (CDs) generally vary with banks’ financial conditions.
Park and
Peristiani (1998) also find evidence for market discipline by insured depositors, notwithstanding
their lower effect compared to uninsured depositors.
In a cross-country survey, Demirgüç-Kunt, Karacaovali, and Laeven (2005) show that
while less than 49 percent of the 181 surveyed countries have enacted an explicit deposit
insurance covering deposits up to some level, only 38 percent of the total are permanently
funded, indicating that deposit insurance funds are limited. Except for Norway where the deposit
coverage is close to $300,000 and a few other economies where deposits are explicitly fully
insured,8 all other countries with explicit deposit insurance have a coverage limit well below that
of the US, which was increased from $100,000 to $250,000 in 2008 and this increase was made
permanent by Dodd-Frank in 2010. However, the study also points out that several countries
without explicit coverage have taken steps in the past to compensate uninsured depositors. So it
is not just deposit insurance that matters, but the entire government safety net that helps protect
bank creditors, especially for banks considered to be too important to fail. Barrell, Davis, Fic,
and Karim (2011) find a direct relationship between bank size and risk taking, which is
consistent with the existence of implicit too-big-to-fail insurance that increases moral hazard
incentives. In line with this, Jacewitz and Pogach (2013) find that largest banks pay significantly
less on comparable deposits than their smaller bank counterparts. Demirguc-Kunt and Huizinga
(2004) use cross-country information on deposit insurance systems to investigate the impact of
explicit deposit insurance on bank interest rates and market discipline. They find that explicit
deposit insurance lowers banks’ interest expenses and makes interest payments less sensitive to
bank risk, thus undermining depositor discipline.
8
EU countries with unlimited deposit insurance include Ireland as of September 2008 and Slovenia as of November
2008 until December 2010.
8
Most of the previous research, as well as the main analysis in our study, includes both
insured and uninsured deposits because they are often difficult to separate, although we also
include an additional analysis of uninsured deposits in the US. Hannan and Hanweck (1988)
report a significant relationship between the rates on large and partially insured CDs and bank
risk as measured by leverage, variability of earnings, and risk assets. Goldberg and Hudgins
(2002) report that depositors adjusted their holdings at thrifts from 1984 to 1994 in response to
impending institutional failure.
The authors argue that deposits are governed by market
discipline, and they recommend decreasing insurance limits on deposits to reduce the “perverse
incentive features of deposit insurance” and increase market discipline. Ellis and Flannery
(1992) find evidence to suggest that CD rates paid by large money center banks include
significant default risk premia. Other studies examining the market discipline effect of deposits
include Billet, Garfinkel, and O’Neal (1998), who show that banks tend to rely more on insured
funds as they get into trouble, and Park and Peristiani (1998) and Goldberg and Hudgins (1996),
who find evidence of depositors’ discipline in US thrifts and S&Ls, respectively. Maechler and
McDill (2006) also focus on deposits at US banks to show that, by raising the cost of choosing a
higher level of risk, depositor discipline may effectively constrain managers’ behavior.
A few studies, however, conclude that deposits have no market disciplining effect on
bank managers. Gilbert and Vaughan (2001) do not find unusual deposit withdrawals or spread
increases following the announcements of formal enforcement actions. Jordan, Peek, and
Rosengren (1999) examine deposit level changes following formal action announcements and
improved disclosure for problem banks during a banking crisis and find only a moderate decline
9
in deposit levels. Jagtiani and Lemieux (2001) find no evidence of market discipline in the CD
market.9
Research on depositor discipline in the context of European countries is scant.
Mondschean and Opiela (1999) report that there is little depositor discipline in Poland, likely
because full deposit insurance and government ownership of Polish banks reduce the monitoring
incentives of depositors. Birchler and Maechler (2001) find considerable evidence of depositor
discipline in Switzerland – depositors are sensitive to bank specific fundamentals, to institutional
differences across bank groups, and to institutional changes to the Swiss bank depositor
protection system. Using a sample of Central and Eastern European banks, Distinguin, Kouassi,
and Tarazi (2013) find that banks with a higher proportion of interbank deposits have lower
levels of risk.
Depositor discipline has recently been investigated in Russia, where Ungan, Caner, and
Özyildirim (2008) show that well-capitalized and more liquid banks significantly increase their
deposits. Semenova (2007) also analyzes depositor discipline in Russia by different groups of
banks (state, private, and foreign). The author finds that depositors of foreign banks exert
virtually no discipline, while depositors of state banks use a quantity-based discipline
mechanism, but the only significant characteristic is bank size (depositors are sensitive to bank
total assets even after introduction of the deposit insurance system), and depositors of private
domestic banks discipline their banks by quantity, price, and by switching from on-call to longterm deposits. Karas, Pyle, and Schoors (2013) use the introduction of deposit insurance for
9
In a contemporaneous working paper that is closest to ours, Lambert, Noth, and Schüwer (2013) find an increase in
risk taking by some banks in the U.S. after the deposit insurance cap was raised from $100,000 to $250,000 in 2008.
However, they do not look at depositor discipline directly.
10
households in Russia as an event study to test for its effect on market discipline, and find that
deposit inflows and outflows are less sensitive for insured than for uninsured depositors.
Much of the empirical research on depositor discipline in countries other than the US or
Europe is for Latin American countries.
Martinez Peria and Schmukler (2001) find that
depositors disciplined banks by withdrawing deposits and by requiring higher interest rates in
Argentina, Chile, and Mexico during the 1980s and 1990s. Calomiris and Powell (2001) find
that in Argentina, both large deposit withdrawals and high interest rates are associated with great
asset risk and leverage. Barajas and Steiner (2000) report that depositors in Colombia prefer
better capitalized, highly liquid, and profitable banks with low non-performing loans.
In Japan, the depositor discipline study of small financial institutions by Murata and Hori
(2006) supports the effective role of market discipline. Hori, Murata, and Ito (2009) also
investigate depositor discipline for institutions in Japan. They find that depositors appreciate the
difference between healthy banks and risky banks, and that depositors of larger institutions are
more sensitive to bank risk than those of smaller institutions.
Other related research includes Ghosh and Das (2006), who find that depositors in India
‘punish’ banks for risky behavior, judged in terms of either the quantity or the price variable.
However, Omet and Fayyoumi (2004) document that depositor discipline is largely non-existent
in Jordan.
III - DATA AND METHODOLOGY
A. DATA
We retrieve the financial statements for 2,038 banking organizations in the US and 21 EU
countries plus Switzerland from the Bankscope database provided by Bureau van Dijk and Fitch
11
Ratings, including bank holding companies (BHCs) and commercial banks. We divide our
sample into two periods: the pre-crisis period 1997-2007 (with a total of 13,494 bank-year
observations) and the crisis period 2008-2009 (with a total of 3,995 bank-year observations).10
We also extract data from Bankscope on shareholder ownership to identify the majority
shareholder to account for foreign-controlled institutions. Next, we match the banking sample
with data from the Zephyr database (Bureau van Dijk Electronic Publishing), which provides
historical information on merger and acquisition deals since the year 1997. We incorporate
information on bank mergers and acquisitions (M&As). We specifically exclude from our
sample bank-year observations in which a merger deal is concluded to avoid counting the
consequent increase in bank size as a reduction in depositor discipline and to avoid problems in
measuring lagged variables. In a follow-up analysis, we collect data from the bank Call Reports
in the US, which separate uninsured deposits from insured deposits and focus on the uninsured,
which should be more sensitive to risk. We describe the data and results for this analysis in detail
in Section V – Robustness.
Table 1 lists the distribution of banking organizations across countries for the pre-crisis
period 1997-2007 and the crisis period 2008-2009.11 In our sample, almost 46% of all banks are
from the US. The majority of banks in all countries are commercial banks, with the lone
exception of the US where bank holding companies have a dominant presence relative to other
countries. We also categorize our banks as listed and non-listed financial institutions. Publiclylisted financial institutions represent less than 20% of all banks, with more than 64% of them
located in the US. Also, the number of listed institutions varies from one in some EU countries
10
During the sample period, EU publicly traded firms were required to switch from their national accounting
procedures to IFRS no later than January 1, 2005. We account for the change in accounting practices by including
time dummies in our analysis, and we do not believe that the adoption of IFRS standards affects our dependent
variables.
11
We winsorize the data at the top and bottom 1st percentile of the distribution.
12
to over one-fourth of all banks in the US. Note that the number of banks has slightly decreased
following the recent financial crisis, especially for listed banks.
We compute the deposit growth rate on an annual basis for all banks in our sample. 12
Table 2 provides a description of all of the variables and Table 3 presents descriptive statistics
for our key variables across the US and the EU for the pre-crisis period 1997-2007 (Panel A) and
the crisis period 2008-2009 (Panel B). In both Panels A and B, the average bank size is larger
for European banks compared to the US, and there is also greater variability in bank total assets
in Europe. However, the average equity-to-assets ratio is higher for the US than for the EU
(9.4% vs. 7.7%, respectively, in the pre-crisis period and 10.3% vs. 9.1%, respectively, for the
crisis period), and US banks carry, on average, a better loan portfolio quality relative to EU
banks.
In the pre-crisis period, the average ratio of nonperforming loans to total loans
(NPL/Loans) stood at 0.66 percent for the US, while the corresponding figure for the European
banks was 4.14 percent. During the crisis period, however, the average gap in the ratio of
NPL/Loans between the US and the EU closed considerably, with the mean for the US spiking to
3.61% compared to 4.19% for the EU. Deposit growth was higher in the EU than in the US in
the pre-crisis period (11.02% vs. 9.10%, respectively), but this finding is reversed with the
advent of the crisis (4.22% vs. 10.08%, respectively, for the EU and the US).13
B. METHODOLOGY
We investigate depositor discipline proxied by the deposit growth rate in face of greater
bank risk taking. We proxy for bank risk taking using the ratio of equity to assets and an
12
Quantities of deposits may be subject to window dressing, but we do not believe that it is very often the case. The
evidence suggests that banks window dress their assets, rather than deposits (see Allen and Saunders 1992).
13
Some of these differences may be attributable to changes in exchange rates, but we do not believe this to be a
significant factor because most depositors just deal with their home currency.
13
indicator of loan portfolio performance – the ratio of nonperforming loans to total loans.14,15 In
robustness checks, we try other measures of loan performance.
We regress deposit growth on indicators of bank risk taking, while controlling for bank
characteristics and country differences:16
DGRij ,t  f ( BankRiskij ,t 1 , DRPij ,t 1 ,Wij ,t , Z j ,t )   it
(1)
where DGRij,t denotes the deposit growth rate17 for bank i in country j at time t.18 BankRiskij,t-1
proxies the bank’s risk taking in the previous period using the equity-to-assets ratio and the
nonperforming-loans-to-total-loans ratio mentioned previously. DRPij,t-1 represents the lagged
deposit rate premium.19 Wij,t represents bank controls, including growth in assets20 and market
share of assets, institution type in the form of a BHC, and whether the majority shareholder is
foreign. The foreign dummy is included because foreign parent organizations may be viewed as
sources of strength, or alternatively, foreign owned banks might be more or less opaque than
domestic institutions.21 Zj,t controls for country differences for country j at time t, including the
presence of explicit deposit insurance, Financial Freedom, the three-month money market rate,
the percentage change in real GDP, and the natural logarithm of GDP per capita. Other country
14
Our analysis rests on accounting ratios because market values are unavailable for most banks. Any measurement
error introduces a bias against finding statistically significant depositor discipline, which we do find.
15
Kalemli-Ozcan, Sorensen, and Yesiltas (2012) argue that excessive risk taking is not easily detectable at banks
because it involves the quality rather than the quantity of assets.
16
We also tried changes in risk and allowed them to have asymmetric effects and found the main results to hold, but
more weakly, with no consistent greater effect of either increases or decreases in risk (not shown).
17
Deposit growth rate is calculated as 100 multiplied by the natural logarithm of the ratio of total deposits to total
deposits lagged by 1 year.
18
We acknowledge that there could be some inertia in the deposit quantities because some banks significantly rely
on term funding, which would bias the results against finding depositor discipline.
19
Deposit rate premium is calculated as 100 multiplied by the difference between deposit rate and the short-term
Treasury rate for the country in question measured at year end, where deposit rate equals the ratio of interest
expenses to total deposits.
20
Asset growth is included to control for any increase in deposits caused by the bank wanting to keep pace with
asset growth.
21
We do not have information on whether banks are government owned, but this should not be a significant issue
for most of these developed nations and is not the focus of our study.
14
controls are dummy variables for banks in the UK and in the US because of the different levels
of capital market development in these countries. Exceptions are that the US dummy is excluded
from the US and EU regressions and the UK dummy is excluded from the US regressions
because there is no variation in these variables in these regressions. All variables are expressed
in 2007 real U.S. dollars. We estimate equation (1) using random effects.22
The inclusion of the lagged deposit rate premium is to deal with a potential endogeneity
problem.
High deposit rate premiums may result in an increase in deposit growth in the
following year, as depositors may be attracted by the higher rates. We account for this by
including a lag of the deposit rate premium in the determination of the deposit growth rate. That
is, we examine how sensitive deposit growth is to an increase in bank risk, controlling for lagged
deposit rate premium, while controlling for bank and country characteristics. By controlling for
DRP, we can also be relatively certain that the DGR reactions to BankRisk reflect actions by the
depositors because a change on the part of the banks themselves would generally require a
change in the deposit rate premium. As discussed in the robustness section, our results are robust
to dropping the lagged deposit rate premium, and to the use of a dynamic model.
IV - MAIN EMPIRICAL FINDINGS
A. PRE-CRISIS PERIOD 1997-2007
We present the regression results over the pre-crisis period for large banks (above the top
10th percentile of total banking assets in their nation in real 1997 US dollars) in Table 4, with
corresponding results for small banks (below the top 10th percentile) in Table 5. We run
22
We also try fixed effects and our main findings are maintained, but doing so results in dropping some of our
important control variables (Foreign, BHC, Deposit Insurance, and UK and US dummy variables), so we prefer the
random effects model as our main approach.
15
estimations separately for US banks, EU banks, listed banks, and unlisted banks.
In all
estimations, we include two types of indicators of bank risk taking, capitalization (ratio of equity
to assets) and loan portfolio performance (ratio of nonperforming loans to total loans). We first
discuss the statistical significance of the main coefficients of interest, and then discuss their
economic significance.
The DGR pre-crisis regression results for large banks in Table 4 show that the coefficient
on equity to assets is positive and significant for large US banks and large unlisted banks, but
insignificant for large banks in the EU and large listed banks. A worsening in the ratio of equity
to assets – or an increase in bank risk – is positively associated with a reduction in the deposit
growth rate at large US banks and large unlisted banks, but has no significant effect on large
banks in the EU or large listed banks. Prior to the crisis, depositors at large US banks seemed to
react in face of greater bank risk taking (lower equity to assets ratios) by curtailing the rate of
growth in their supply of funds.
Depositor discipline is also found using the ratio of nonperforming loans to total loans.
The coefficient estimate on NPL/Loans is negative and significant for large US and EU banks
and for large unlisted banks, implying that an increase in NPL/Loans – or an increase in bank
risk – reduces deposit growth rates at those banks, but has no significant effect on large listed
banks.23
Thus, we find that depositor discipline is more often significant at large US banks. In the
EU, there may be a greater ex ante perception on the part of depositors that large banks are likely
23
We acknowledge the possibility that bank supervisors may affect deposit growth rates in response to bank
riskiness. To the extent that this occurs, our findings reflect supervisory discipline as well as depositor discipline.
However, evidence from Germany suggests that supervisors only seldomly intervene on the liability side of banks’
balance sheets (Berger, Bouwman, Kick, and Schaeck (2014)).
16
to enjoy too-important-to-fail protection compared to the US and/or depositors in the EU may
have been less aware of banks’ risks.24 Further, we find that there is less measured depositor
discipline for large, listed institutions.
As argued above, the measured effect of depositor
discipline may be greater at unlisted institutions because depositors have less information
available, so that the reaction to any one ratio may be stronger.25
In Table 5, we find a significant and positive relationship between the ratio of equity to
assets and DGR for small banks pre-crisis. Lower bank capitalization is associated with reduced
deposit growth rates. The quantity response of depositors at small banks to greater risk taking in
the form of lower equity to assets is significant across all models except for small unlisted banks.
In addition, the coefficient on NPL/Loans is of the expected sign in Table 5 across all
specifications.
It is negative and highly significant, suggesting that poorer loan portfolio
performance and consequently high levels of bank risk are associated with lower deposit growth
rates at small banks, whether in the US or EU and across listed and unlisted institutions.
We next examine the economic significance of the pre-crisis results using the ratio of
equity to assets measure of bank risk taking. We first assess the economic significance of a 1
percentage point increase in the ratio of equity to assets on DGR for large and small banks. In
Table 4, the coefficient on equity to assets for large US banks is 85.344. Given an average
deposit growth rate for large US banks of 9.10%, a 1 percentage point increase in equity to assets
increases the DGR by more than 85 basis points to become 9.95%. An analysis for small US
banks shows that the effect of a 1 percentage point increase in bank capitalization is less
24
We acknowledge the possibility that some of the stronger results for the US may be due to more supervisory focus
on the leverage ratio compared to the EU.
25
We conduct tests of differences in means for the coefficients on bank risk for large US and EU banks and for large
listed and unlisted banks. We find that differences are generally statistically significant across most specifications.
17
economically significant than for large US banks. In Table 5, the coefficient on equity to assets
for small banks is 13.796 and is around 16% of the corresponding estimate reported for large US
banks.26
The greater economic significance for large banks may reflect that more of the
depositors at large banks are uninsured and therefore more sensitive to bank risk or greater
knowledge of risk on the part of depositors at large banks than depositors at small banks.
For large EU banks, the effect the ratio of equity to assets is not statistically significant.
For small EU banks, a 1 percentage point increase in equity to assets raises the deposit growth
rates marginally by 21 basis points.
Before proceeding to the crisis results, we briefly investigate the extent to which
listed/unlisted split may be picking up something besides the information from being on an
exchange. We first note that foreign banks make up only a minority of observations of the large
listed, large unlisted, small listed, and small unlisted subsamples, with the largest proportional
foreign representation in large listed banks (158 of 511 are foreign). Next, we observe that the
listed banks are mostly from the US, both for large listed banks (221 of 353 are from the US) and
small listed banks (1986 of 2575).
No other country has as much as 10% of the listed
observations. We also try separating by US and UK versus other countries for listed and unlisted
banks in the regressions as an additional way to account for the greater capital market
development of these nations. We find that the effect of the ratio of equity to assets is significant
for both listed samples (US/UK and other countries) and insignificant for both unlisted samples
(US/UK and other countries). The NPL/Loans variable is significant in all four regressions.27
B. CRISIS PERIOD 2008-2009
26
We conduct tests of differences in means for the significance of coefficients on bank risk and similarly find that
there are statistical differences in depositor discipline across large and small US banks.
27
These statistics and results are all available upon request from the authors.
18
We next consider the crisis period 2008-2009, and investigate whether discipline is
decreased by the government interventions taken at the beginning of the crisis or alternatively, is
increased by the public’s heightened awareness of bank risk. We present the results for large and
small banks in Tables 6 and 7, respectively.
In Table 6, the coefficients on equity to assets and the NPL/Loans ratio lose statistical
significance for large banks and are at times of the opposite sign as predicted. These results are
consistent with the hypothesis that government interventions during the crisis resulted in weaker
depositor discipline for large banks. It is just as likely that these findings are due to reduced test
power because of the significantly fewer observations during the crisis period, an alternative we
test in Table 8 below, where we look at whether the changes in the coefficients between the crisis
period and pre-crisis period are statistically significant.
In contrast, as shown in Table 7, the coefficients on our two measures of bank risk remain
significant and sometimes increase in magnitude for small US banks, whereas they sometimes
are significant and of the opposite sign for small EU banks as compared to the pre-crisis period.
Preliminarily, it appears that for small banks, depositor discipline continued for US banks and
was weakened or disappeared for EU banks. Again, we will test the changes in the coefficients
in Table 8.
Table 8 shows our formal tests of the changes in depositor discipline. Specifically, we
show t tests of the difference between the coefficients of the key depositor discipline coefficients
in Tables 6-7 versus Tables 4-5.
Negative signs on Equity/Assets and positive signs on
NPL/Loans point to reduced depositor discipline. For clarity, we shade all of the t tests that are
significant. We find that, for large banks, the signs generally point in the direction of reduced
19
depositor discipline, and are significant in some cases for NPL/Loans. For small banks, the signs
are somewhat mixed, but the significant t tests point to increased depositor discipline US small
banks and reduced discipline for small EU banks. Overall, these results are consistent with
depositors at large banks in the US and EU and small banks in the EU reducing their discipline
due to government actions taken near the beginning of the crisis, but depositors at small US
banks maintaining or increasing their discipline due to heightened awareness of bank risk
because of the numbers of failures of such banks.
To analyze the economic significance of the changes in depositor discipline, we again
focus on Equity/Assets ratios using the reduced form results. For the pre-crisis period, we found
above that a 1 percentage point increase in equity to assets would increase the expected deposit
growth rate for large US banks by an estimated 85.32 basis points. For the crisis period, this is
entirely eliminated – it changes to a 40.56 basis point decrease. For large EU banks, listed
banks, and unlisted banks, depositor discipline completely vanishes in the crisis period. For small
banks, depositor discipline at US banks actually increases in economic significance in the crisis
period relative to the pre-crisis period (the coefficient on the ratio of equity to assets increasing
from 13.93 to 55.59), but it disappears for EU banks.
V - ROBUSTNESS
We run a number of robustness checks of our main results. The results are consistent
with our main results and are not shown in tables to conserve space.
We first test the sensitivity of our results to including other indicators of loan portfolio
quality. We consider two alternative measures of loan portfolio performance – the ratios of loan
loss reserves to total loans (LLR/Loans) and net charge-offs to total loans (NCO/Loans). When
20
these variables are used in place of NPL/Loans, the Equity/Assets results and the loan
performance results are similar to our main results. Specifically, depositor discipline is stronger
at large US banks compared to EU banks as well as at large unlisted institutions. We also follow
the methodology of Berger, DeYoung, Flannery, Lee, and Oztekin (2008) to test the robustness
of our results using a dynamic model that allows for partial adjustment to desired deposit growth
rates slowly over time and find our results to be maintained.28
Since we are presenting in this paper a US versus EU perspective on depositor discipline,
we run all of our specifications excluding banks in Switzerland and find robust results. We also
examine whether our results are fairly consistent across countries in Europe or whether there
were any country-specific effects. We find different degrees of depositor discipline in Austria,
Belgium, Cyprus, Denmark, France, Italy, Malta, Norway, Slovenia, Switzerland, and the UK,
but no evidence of depositor discipline in Germany, Luxembourg, Netherlands, and Spain.29 The
signs of the key coefficients are generally consistent across countries.
We also try a cutoff of $50 billion for large banks – motivated by the Dodd-Frank Act
provision that designates banking organizations above this level as systemically important to
receive additional regulation by the Federal Reserve – and we exclude bank control variables
from all specifications because they could be considered as measures of risk. All of our previous
findings are preserved.
We also consider changes instead of levels of risk, and find that the key coefficients are
generally statistically significant for the same variables as for the regressions with levels. We
28
Berger, DeYoung, Flannery, Lee, and Oztekin (2008) use Generalized Method of Moments estimation (Blundell
and Bond, 1998) that allows a target variable (the deposit growth rate in our case) to adjust to a long-run desired
level slowly over time within a partial adjustment framework.
29
Not all countries are represented in these lists because some nations had too few observations to measure
depositor discipline separately.
21
also allow for asymmetric effects of increases and decreases in risk and find the results to
generally hold, with no consistent greater effect of either increases or decreases in risk.
Additionally, late in 2007, the announcement by the Federal Reserve to start the Term
Auction Facility on December 17 and by the European Central Bank (ECB) and the Swiss
National Bank (SNB) to hold dollar auctions might have affected the deposit growth rate at the
end of 2007. To allow for this, we try ending our pre-crisis period in 2006 and adding 2007 to
the crisis period. Our results are qualitatively unchanged.
VI – TESTS USING UNINSURED DEPOSITS IN THE US
We also acknowledge that the Bankscope data have some limitations. While they have
the advantage of allowing a comparison across countries, they also have the disadvantage that
the data are not very disaggregated. Thus, we are not able to distinguish between insured versus
uninsured deposits. To mitigate these concerns, we use data for the US banks to conduct a
supplementary analysis which allows us to focus on uninsured deposits and more directly test
depositor discipline.
For this analysis, we acquire annual bank data over 1997 – 2009 from the Call Reports,
which contain financial information on all commercial banks in the US. We adjust the data to be
in real 1997 terms using the GDP price deflator. Our initial dataset comprises 113,807 bank-year
observations. We omit observations that do not refer to commercial banks according to the Call
Reports Indicator, which leaves us with 102,587 observations. We next remove any observations
that have missing or incomplete financial data on basic accounting variables such as total assets
and equity, as well as observations that have missing or negative data for income statement
variables such as interest expenses, personnel expenses, and non-interest expenses, resulting in
22
102,584 bank-year observations. Following the procedure in Berger and Bouwman (2009), we
further refine our sample by excluding observations with no outstanding loans or deposits (i.e.,
entities not engaged in deposit-taking and loan-making, which are required for banks to be
considered commercial banks). In addition, as in our cross-country analysis, we specifically
exclude from our sample bank-year observations in which a merger deal is concluded. These
screens leave us with a final sample of 94,196 bank-year observations for 10,490 banks over the
entire sample period. We do not include the deposit rate premium in this analysis because we do
not have sufficient data to calculate this premium for uninsured deposits. Finally, to avoid
distortions in ratios that contain equity, for all observations with total equity less than 1% of total
assets, we replace equity with 1% of total assets, consistent with the treatment in Berger and
Bouwman (2013). We keep observations of the impaired banks because this is where we expect
the strongest depositor discipline if there is any.
To calculate uninsured deposits, we take all the funds in accounts that are partially
insured and subtract off the amount that is insured. This requires separate treatment for several
time periods because of the changes in the insured deposit limits over time.30
30
For the period 1997:Q1-2006:Q1, we calculate the uninsured deposits as the amount of bank deposit accounts
(demand, savings, and time) with a balance on the report date of more than $100,000 minus the number of such
deposit accounts multiplied by $100,000. For the period 2006:Q2-2009:Q2, we take into account the different
treatment of deposit retirement accounts versus the rest. Thus, we calculate the uninsured deposits as the amount of
bank deposit accounts (demand, savings, and time, excluding retirement accounts) with a balance on the report date
of more than $100,000 minus the number of such deposit accounts multiplied by $100,000 plus the amount of bank
deposit retirement accounts with a balance on the report date of more than $250,000 minus the number of such
deposit accounts multiplied by $250,000. For the period 2009:Q3 onwards, we account for the deposit insurance
limit increase from $100,000 to $250,000 for all deposits except foreign ones. Thus, we calculate the uninsured
deposits as the amount of bank deposit accounts (demand, savings, and time, including retirement accounts) with a
balance on the report date of more than $250,000 minus the number of such deposit accounts multiplied by
$250,000. While the last change in deposit insurance took place in October 2008, the call report did not change to
reflect it until 2009:Q3. For all time periods, we also add the foreign deposits to the uninsured deposits because
foreign deposits are not covered by the FDIC deposit insurance.
23
Our regression results are reported in Table 9 and present the estimated models for both
small (below the top 10th percentile of national total assets in real 1997 US dollars) and large
banks (above the top 10th percentile of national total assets in real 1997 US dollars). We run
estimations separately for the pre-crisis time period 1997-2007 and the crisis period 2008-2009.
In all estimations, we include two types of indicators of bank risk taking, capitalization (ratio of
capital to assets) and loan portfolio performance (ratio of nonperforming loans to total loans).
The regression results in Table 9 columns (1) and (2) show that over the pre-crisis period,
the coefficient on equity to assets is positive and significant for both large and small US banks,
while the coefficient estimate on NPL/Loans is negative and significant for both size classes in
the US. Using both risk indicators results suggest that prior to the crisis, depositors exerted
market discipline at US banks and reacted in face of greater bank risk taking by curtailing the
rate of growth in their supply of uninsured deposits, consistent with our main results for US
when using the Bankscope data, which is a much smaller data set that comingles insured and
uninsured deposits. When looking at the crisis period results in columns (3) and (4), we find that
the coefficient on equity to assets flips sign and loses significance for large US banks, but it is
still positive and significant and slightly higher for the small banks. However, the coefficient
estimate on NPL/Loans is no longer significant for either large or small banks in the US.
Consistent with our prior findings, these results suggest that depositor discipline declined during
the financial crisis for large US banks potentially due to government interventions. In contrast,
depositor discipline is maintained during the crisis for small US banks, at least for the equity to
assets ratio, potentially due to heightened awareness of the uninsured depositors in these banks
because of the numbers of small banks that failed during the crisis, although other explanations
are possible.
24
Table 10 shows t tests of the difference between the coefficients of the key depositor
discipline coefficients between the crisis and pre-crisis periods in Table 9. Negative signs on
Equity/Assets and positive signs on NPL/Loans point to reduced depositor discipline. For clarity,
we shade all of the t tests that are significant. By looking at the difference between the crisis and
pre-crisis periods, we find that discipline was significantly reduced for Equity/Assets for the
large banks and also reduced for the small banks when looking at NPL/Loans. The other results
did not significantly change, which could reflect the lack of test power because of the small
number of observations for the crisis period.
VII - CONCLUSIONS
This paper examines depositor discipline of bank risk taking in the US and EU (plus
Switzerland) in the 11-year period prior to the recent financial crisis, and in 2 years of crisis. We
also analyze how the effects of such discipline may differ between large and small institutions,
and between listed and unlisted banking organizations. We look at the effects on deposit growth,
and examine whether depositors react more to bank equity-to-asset ratios or measures of loan
portfolio performance. Finally, and most importantly, we test the hypothesis that the measures
that governments took at the beginning of the crisis reduced depositor discipline versus the
hypothesis that depositor discipline may have increased due to heightened depositor attention to
bank risk.
Our results suggest that there was significant depositor discipline in both the US and EU
prior to the crisis, but generally that the effects were stronger in the US for large institutions,
consistent with the conjecture that government bailouts were considered to be more likely in the
EU and/or that depositors in the EU may have been less aware of banks’ risk. We also find more
25
economically significant depositor discipline for large US institutions (larger than the top 10th
percentile of national assets) than for small US institutions (smaller than the top 10th percentile of
national assets), possibly reflecting the greater preponderance of uninsured deposits in the large
institutions or greater sophistication of large bank depositors. However, we find less measured
discipline for large, listed institutions compared to other institutions, perhaps because depositors
at unlisted institutions have less information available, so that the reaction to the measured ratios
may be stronger.
Finally, we find evidence consistent with the hypothesis that depositor
discipline generally declined after implementation of the government actions, except for the case
of small US banks, where depositors, particularly those that were uninsured, may have become
more sensitive to bank risk taking through capital ratios, due to heightened awareness of the
numbers of small banks that failed during the crisis.
In terms of policy conclusions, our findings suggest that significant depositor discipline
existed prior to the recent financial crisis, and that actions such as raising deposit insurance
coverage limits, reducing co-insurance, and rescuing troubled institutions may have eroded an
important source of discipline on the risk taking of banking organizations in both the US and EU.
However, Basel III may be complementary to depositor discipline: To the extent that it is
effective in getting banks to raise their equity capital, the affected banks will be rewarded with
additional deposits. In addition, under the Dodd-Frank Act, US banks with over $50 billion in
assets are considered systemically important, and may be required by the Federal Reserve to hold
additional capital, with implications for deposit growth. Finally, making the public aware of the
risks to depositors may have a beneficial effect in terms of disciplining risky banks.
Future research beyond the scope of this paper might consider ex-post failures as
alternative measures of ex-post risk taking instead of our lagged variables of equity to assets or
26
nonperforming loans to total loans. It is also possible to consider executive compensation
schemes (e.g., Cheng, Hong, and Scheinkman, 2011) or employee ownership structures (e.g.,
Berger, Imbierowicz, and Rauch, 2014) as alternatives to depositor discipline in controlling bank
risk.
27
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(eds.), Boston: Kluwer Academic Publishing: 221-231.
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31
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32
Table 1
Distribution of Banks across Countries
for the Pre-Crisis Period 1997-2007 and Crisis Period 2008-2009
COUNTRY
Austria
Belgium
Cyprus
Denmark
Pre-Crisis Period 1997-2007
Num. of Banks
Listed
BHC
42
5
7
34
2
8
8
3
1
38
23
3
Crisis Period 2008-2009
Num. of Banks
Listed
BHC
39
34
8
38
3
4
3
18
5
8
1
3
Finland
France
Germany
Greece
Iceland
Ireland
10
143
132
24
5
36
2
8
12
12
1
4
1
4
12
1
0
0
10
143
123
24
5
36
3
7
8
10
0
2
1
6
10
1
0
0
Italy
Liechtenstein
Luxembourg
Malta
Monaco
Netherlands
143
5
92
6
8
57
15
1
1
2
1
3
11
1
6
0
0
15
143
5
92
4
8
57
13
1
1
1
1
5
11
1
6
0
0
13
16
31
12
65
16
65
1
5
2
14
4
11
2
8
0
1
4
9
16
31
11
65
16
64
1
4
3
8
4
8
2
8
0
1
4
9
120
930
2038
8
250
390
25
475
594
119
929
2020
6
230
344
23
472
585
Norway
Portugal
Slovenia
Spain
Sweden
Switzerland
United Kingdom
US
Total
33
Table 2
Variable Descriptions
Variable Name
Description
Deposit Growth
100 multiplied by the natural logarithm of the ratio total deposits to total deposits lagged by 1
year. Source: Authors’ Calculations from Bankscope.
Equity/Assets
The ratio of equity to total assets. Source: Authors’ Calculations from Bankscope
NPL/Loans
Bank Size
A measure of loan portfolio performance, calculated as the ratio of nonperforming loans to total
loans. Bankscope defines nonperforming loans as all impaired loans falling in two types of
retail lending, residential mortgages and other consumer loans, as well as corporate and
commercial loans. Source: Authors’ Calculations from Bankscope.
100 multiplied by the difference between deposit rate and the short-term Treasury rate in that
country measured at the end of the year; where deposit rate equals the ratio of interest expense
to deposits and money market funding. Source: Authors’ Calculations from Bankscope.
The natural logarithm of total assets. Source: Authors’ Calculations from Bankscope.
Market Share
The bank’s market share in assets. Source: Authors’ Calculations from Bankscope.
Money Market Rate
The three-month money market rate. Source: Thomson Datastream Advance 4.0
Foreign
A dummy variable set to 1 if the majority shareholder of the bank is a foreigner.
BHC
A dummy variable for Bank Holding Companies. Source: Bankscope.
Deposit Insurance
A dummy variable set to 1 if there is an explicit deposit insurance scheme in a country and
depositors were fully compensated the last time a bank failed. Source: Barth, Caprio and
Levine (2013)
The freedom for banks to engage in nontraditional banking activities. Source: Heritage
Foundation.
Deposit Rate premium
Financial Freedom
GDP Growth
GDP pc
Uninsured Deposit
Growth (US)
Rate of growth in real GDP calculated as 100 multiplied by the natural logarithm of the ratio of
real GDP to real GDP lagged by 1 year. Source: Authors’ Calculations from the International
Financial Statistics.
The natural logarithm of GDP per capita. Authors’ Calculations from the International
Financial Statistics.
100 multiplied by the natural logarithm of the ratio of uninsured deposits to uninsured deposits
lagged by 1 year. Uninsured deposits are calculated as discussed in footnote 24 in the text.
Source: Authors’ Calculations from US Call Report.
34
Table 3
Descriptive Statistics
Total Assets are in million of real U.S. 1997 dollars, DGR is deposit growth rate (in %), Equity/Assets is the ratio of
equity to total assets, and NPL/Loans is the ratio of nonperforming loans to total loans (in %).
Total Assets
Panel A: Pre-Crisis Period 1997-2007
Mean
25,900
Std Dev
108,000
US Banks
Min
8.2
Max
2,190,000
Mean
38,800
Std Dev
172,000
EU Banks
Min
21.5
Max
2,970,000
Panel B: Crisis Period 2008-2009
Mean
48,000
Std Dev
202,000
US Banks
Min
391
Max
2,220,000
Mean
74,500
Std Dev
288,000
EU Banks
Min
6
Max
3,500,000
DGR
Equity/
Assets
NPL/
Loans
9.104
14.037
-10.226
46.515
11.023
22.145
-30.133
59.829
0.094
0.029
0.048
0.175
0.077
0.051
0.019
0.217
0.658
0.718
0.000
4.194
4.144
4.268
0.000
15.565
10.082
21.152
-89.209
113.871
4.220
34.762
-191.213
152.858
0.103
0.051
0.014
0.381
0.091
0.116
0.000
0.820
3.611
3.849
0.000
20.432
4.197
4.105
0.000
22.110
35
Table 4
Pre-Crisis Period 1997-2007: Large Banks, Deposit Growth Rate Models
The dependent variable is deposit growth rate (DGR); bank risk variables include the lagged values of the ratio of equity to assets
(Equity/Asset) and of the ratio of nonperforming loans to total loans (NPL/Loans) as a measure of loan portfolio performance.
Lagged DRP is the lagged deposit rate premium. Market Share is the bank’s national share in assets and Assets Growth is the
lagged value of the growth in bank assets; Foreign identifies the largest shareholder as a foreign entity; BHC is a dummy variable
for bank holding companies; DI is a dummy variable for explicit deposit insurance; Fin. Freedom is the financial freedom of banks
to engage in nontraditional activities; MM Rate is the three-month money market rate; GDP growth is the real growth in GDP;
GDP pc is per capita gross domestic product; and US and UK are dummies for banks in the US and UK, respectively. All variables
are expressed in 1000s of 1997 real U.S. dollars. The constant term is not reported. Robust standard errors are in parentheses. *
p<.1, ** p<.05, *** p<.01
US Banks
Equity/Assets
NPL/Loans
EU Banks
Listed
Unlisted
85.344
68.12
66.665
66.436
(26.845)***
(65.088)
(48.570)
(29.016)**
-3.417
-1.256
-0.151
-2.213
(0.810)***
(0.576)**
(0.822)
(0.638)***
Lagged DRP
-0.012
-0.292
0.524
-0.243
(0.187)
(0.317)
(0.383)
(0.190)
Market Share
185.197
0.418
-0.663
-10.07
(54.658)***
(9.021)
(9.005)
(20.382)
0.000
-0.057
-0.017
-0.02
(0.014)
(0.014)***
(0.013)
(0.014)
-1.949
-4.908
-1.508
-4.21
(2.010)
(2.823)*
(1.847)
(3.175)
-1.513
2.307
7.111
-1.1
(1.583)
(3.516)
(4.243)*
(2.029)
6.529
-10.645
9.913
(5.258)
(6.692)
(7.025)
0.036
-0.018
0.126
(0.154)
(0.151)
(0.210)
-0.363
2.143
0.644
0.275
(0.537)
(1.408)
(0.852)
(0.911)
0.827
-0.097
1.614
1.354
Assets Growth
Foreign
BHC
DI
Fin. Freedom
MM Rate
GDP Growth
GDP pc
(0.857)
(1.098)
(0.802)**
(0.848)
-25.856
5.192
-3.38
-0.49
(24.131)
(5.341)
(7.013)
(8.881)
-9.375
-6.754
-6.287
(7.225)
(7.466)
(9.440)
-11.915
-15.499
(4.990)**
(6.514)**
245
378
UK
US
No. of Obs.
457
166
36
Table 5
Pre-Crisis Period 1997-2007: Small Banks, Deposit Growth Rate Models
The dependent variable is deposit growth rate (DGR); bank risk variables include the lagged values of the ratio of equity to assets
(Equity/Asset) and of the ratio of nonperforming loans to total loans (NPL/Loans) as a measure of loan portfolio performance.
Lagged DRP is the lagged deposit rate premium. Market Share is the bank’s national share in assets and Assets Growth is the
lagged value of the growth in bank assets; Foreign identifies the largest shareholder as a foreign entity; BHC is a dummy variable
for bank holding companies; DI is a dummy variable for explicit deposit insurance; Fin. Freedom is the financial freedom of banks
to engage in nontraditional activities; MM Rate is the three-month money market rate; GDP growth is the real growth in GDP;
GDP pc is per capita gross domestic product; and US and UK are dummies for banks in the US and UK, respectively. All variables
are expressed in 1000s of 1997 real U.S. dollars. The constant term is not reported. Robust standard errors are in parentheses. *
p<.1, ** p<.05, *** p<.01
US Banks
Equity/Assets
13.796
Lagged DRP
Assets Growth
Foreign
BHC
9.88
(9.013)**
(11.404)***
(6.383)
-1.664
-0.731
-0.788
-0.996
(0.290)***
(0.165)***
(0.270)***
(0.161)***
0.014
-0.223
-0.154
-0.034
(0.158)
(0.218)
(0.101)
801.56
16.919
11.963
3.688
(603.100)
(7.755)**
(10.441)
(12.347)
0.01
-0.007
0.01
0.004
(0.004)***
(0.007)
-0.639
0.632
0.814
-1.706
(0.950)
(1.294)
(1.100)
(1.272)
0.439
3.669
0.87
0.612
(0.604)
(2.195)*
GDP pc
(1.225)
1.49
3.964
(2.130)
(2.493)
(2.931)
-0.027
0.003
-0.067
(0.056)
(0.056)
(0.049)
0.089
2.505
-0.377
0.369
(0.163)
(0.524)***
(0.271)
(0.251)
0.34
-1.345
1.112
0.296
(0.253)
(0.468)***
(0.299)***
(0.274)
-29.754
5.489
-0.716
2.65
(6.602)***
(1.962)***
(3.277)
(1.938)
-9.548
5.519
-3.803
(2.694)***
(6.961)
(2.509)
-9.252
-8.251
(2.509)***
(1.643)***
1954
2643
UK
US
No. of Obs.
(0.005)
(2.147)
Fin. Freedom
GDP Growth
(0.005)**
2.618
DI
MM Rate
Unlisted
50.48
(0.099)
Market Share
Listed
20.501
(6.197)**
NPL/Loans
EU Banks
3509
1088
37
Table 6
Crisis Period 2008-2009: Large Banks, Deposit Growth Rate Models
The dependent variable is deposit growth rate (DGR); bank risk variables include the lagged values of the ratio of equity to assets
(Equity/Asset) and of the ratio of nonperforming loans to total loans (NPL/Loans) as a measure of loan portfolio performance.
Lagged DRP is the lagged deposit rate premium. Market Share is the bank’s national share in assets and Assets Growth is the
lagged value of the growth in bank assets; Foreign identifies the largest shareholder as a foreign entity; BHC is a dummy variable
for bank holding companies; DI is a dummy variable for explicit deposit insurance; Fin. Freedom is the financial freedom of banks
to engage in nontraditional activities; MM Rate is the three-month money market rate; GDP growth is the real growth in GDP;
GDP pc is per capita gross domestic product; and US and UK are dummies for banks in the US and UK, respectively.31 All
variables are expressed in 1000s of 1997 real U.S. dollars. The constant term is not reported. Robust standard errors are in
parentheses. * p<.1, ** p<.05, *** p<.01
US Banks
Equity/Assets
NPL/Loans
Lagged DRP
Market Share
Assets Growth
Foreign
BHC
EU Banks
4.549
105.191
-62.761
(97.537)
(147.617)
(97.960)
(107.782)
-1.627
1.48
1.385
2.754
(2.959)
(1.418)
(1.830)
(2.356)
-1.104
-1.226
-0.461
-4.421
(1.591)
(0.869)
(0.606)
(1.993)**
-83.08
-5.207
5.272
-142.354
(171.485)
(26.432)
(21.796)
(122.789)
0.093
-0.278
-0.033
0.098
(0.124)
(0.173)
(0.091)
(0.147)
-1.42
-3.691
-5.633
-1.115
(8.358)
(6.532)
(7.487)
(9.484)
-5.985
7.136
7.09
2.787
(7.105)
(8.537)
(10.810)
(11.344)
-6.176
-9.323
7.859
(23.385)
(19.528)
(48.077)
-0.056
-0.412
1.297
(0.447)
(0.495)
(1.011)
-2.79
-0.135
-3.845
(6.295)
(9.005)
(12.964)
Fin. Freedom
MM Rate
GDP Growth
GDP pc
UK
0.214
1.463
-3.5
(2.979)
(2.405)
(8.987)
-15.299
-6.771
-19.585
(16.384)
(23.056)
(27.744)
1.643
-9.271
(22.930)
(44.247)
US
31
Unlisted
-30.897
DI
No. of Obs.
Listed
41
40
-5.517
-4.673
(12.859)
(16.384)
32
49
The UK dummy variable is dropped from the regressions on listed banks as all of the large UK banks were listed during the
crisis sample.
38
Table 7
Crisis Period 2008-2009: Small Banks, Deposit Growth Rate Models
The dependent variable is deposit growth rate (DGR); bank risk variables include the lagged values of the ratio of equity to assets
(Equity/Assets) and the ratio of nonperforming loans to total loans (NPL/Loans) as a measure of loan portfolio performance.
Lagged DRP is the lagged deposit rate premium. Market Share is the bank’s national share in assets and Assets Growth is the
lagged value of the growth in bank assets. Foreign identifies the largest shareholder as a foreign entity, BHC is a dummy variable
for bank holding companies, MM Rate is the three-month money market rate, Fin. Freedom is the financial freedom of banks to
engage in nontraditional activities, GDP growth is the real growth in GDP, and GDP pc is per capita gross domestic product. All
variables are expressed in 1000s of 1997 real U.S. dollars. The constant term is not reported. Robust standard errors are in
parentheses. * p<.1, ** p<.05, *** p<.01
US Banks
Equity/Assets
NPL/Loans
Lagged DRP
Market Share
Assets Growth
Foreign
BHC
EU Banks
Unlisted
54.47
-55.488
34.71
-21.927
(21.647)**
(31.502)*
(43.800)
(21.996)
-1.444
-0.691
-1.31
-0.875
(0.321)***
(0.498)
(0.579)**
(0.345)**
-0.688
-2.504
-0.281
-2.706
(0.749)
(0.459)***
(0.810)
(0.380)***
-1337.084
30.687
23.857
41.225
(1,398.031)
(24.029)
(25.646)
(27.879)
-0.05
-0.11
0.116
-0.117
(0.046)
(0.078)
(0.118)
(0.050)**
-13.047
-6.101
-15.868
-7.885
(2.651)***
(3.652)*
(4.826)***
(2.653)***
1.745
-9.24
-3.436
-1.075
(1.606)
(7.572)
(5.773)
(3.578)
DI
21.92
22.167
(14.440)
(12.418)*
Fin. Freedom
-0.126
-0.763
-0.009
(0.223)
(0.307)**
(0.209)
-6.972
7.546
-8.3
(3.494)**
(5.732)
(3.075)***
MM Rate
GDP Growth
0.428
-0.903
0.862
(1.350)
(1.853)
(1.320)
2.245
-9.699
4.642
(7.777)
(12.390)
(7.010)
3.526
28.137
0.863
(14.103)
(21.740)
(11.707)
13.796
-11.762
(6.921)**
(3.415)***
239
480
GDP pc
UK
US
No. of Obs.
Listed
406
313
39
Table 8
Tests of Differences in Depositor Discipline Coefficients, Deposit Growth Rate Models
Between the Crisis Period 2008-2009 and the Pre-Crisis Period 1997-2007
US Banks
EU Banks
Listed
Unlisted
Large
Banks
Equity/Assets
-1.15
-0.39
0.35
-1.16
NPL/Loans
0.58
1.79
0.77
2.03
Small
Banks
The table shows the t statistics for tests of the difference between the Crisis Period 2008-2009 and the Pre-Crisis Period 1997-2007
for the key depositor discipline exogenous variables Equity/Assets and NPL/Loans in the DGR regression equations. The shaded t
statistics indicate significant differences in depositor discipline between the crisis and pre-crisis periods. Negative signs on
Equity/Assets and positive signs on NPL/Loans point to reduced depositor discipline.
Equity/Assets
1.81
-2.32
-0.35
-1.39
NPL/Loans
0.51
0.08
-0.82
0.32
40
Table 9
US Pre-Crisis Period 1997-2007 and Crisis Period 2008-2009: Uninsured Deposit Growth Rate Models
The dependent variable is the uninsured deposit growth rate; bank risk variables include the lagged values of the ratio of equity to
assets (Equity/Asset) and of the ratio of nonperforming loans to total loans (NPL/Loans) as a measure of loan portfolio
performance. Market Share is the bank’s national share in assets and Assets Growth is the lagged value of the growth in bank
assets; Foreign identifies the largest shareholder as a foreign entity; BHC is a dummy variable for bank holding companies; MM
Rate is the three-month money market rate; GDP growth is the real growth in GDP; GDP pc is per capita gross domestic product;.
All variables are expressed in 1000s of 1997 real U.S. dollars. The constant term is not reported. Robust standard errors are in
parentheses. * p<.1, ** p<.05, *** p<.01.
Equity/Assets
NPL/Loans
Market Share
Assets Growth
Foreign
BHC
MM Rate
GDP Growth
No. Observations
Pre-Crisis Period 1997-2007
Large
Small
195.412***
359.626***
(24.423)
(11.195)
-126.621***
-155.160***
(44.930)
(18.179)
-162.508***
5,721.125***
(23.963)
(610.385)
0.138***
-0.053***
(0.039)
(0.016)
-3.681
0.063
(7.414)
(7.657)
8.745
0.360
(6.420)
(1.405)
0.469
0.710**
(0.962)
(0.296)
1.194
-0.752**
(0.961)
(0.292)
3,948
55,764
41
Crisis Period 2008-2009
Large
Small
-236.872
401.821***
(181.532)
(49.283)
-236.434
-29.034
(162.240)
(56.057)
512.023*
79,079.231***
(260.557)
(5,932.106)
-1.044***
-0.754***
(0.317)
(0.076)
-44.141
(62.688)
24.510
3.512
(71.281)
(13.552)
3.045***
(0.447)
854
5.786***
(0.118)
11,122
Table 10
Tests of Differences in Depositor Discipline Coefficients, Uninsured Deposit Growth Rate Models
Between the Crisis Period 2008-2009 and the Pre-Crisis Period 1997-2007
The table shows the t statistics for tests of the difference between the Crisis Period 2008-2009 and the Pre-Crisis Period 1997-2007
for the key depositor discipline exogenous variables Equity/Assets and NPL/Loans in the uninsured deposit growth rate regression
equations. The shaded t statistics indicate significant differences in depositor discipline between the crisis and pre-crisis periods.
Negative signs on Equity/Assets and positive signs on NPL/Loans point to reduced depositor discipline.
Large
Banks
Equity/Assets
-2.36
NPL/Loans
-0.65
Small
Banks
US Banks
Equity/Assets
0.83
NPL/Loans
2.14
42