Dynamic Depositor Discipline in U.S. Banks
Andrea M. Maechler and Kathleen M. McDill•
Working Paper 2003-7
November 2003
• Kathleen McDill is a Senior Financial Economist in the Division of Insurance and Research
of the Federal Deposit Insurance Corporation. Andrea Maechler is an Economist in the
Monetary and Financial Systems Department of the International Monetary Fund.
We are very grateful to Philip Bartholomew and Lynn Shibut for their insightful comments and
helpful discussions. The paper also benefited from valuable comments by Urs W. Birchler,
Jürg Blum, Hali Edison, Clemens Kool, Tonny Lybeck, and Philip Schellekens as well as by
participants in the 2003 Workshop on Banking and Finance organized jointly by the
Nederlandsche Bank and the Utrecht School of Economics. All errors are our own. The findings,
interpretations, and conclusions expressed in this paper are entirely those of the authors and do
not necessarily represent the views or policy of the International Monetary Fund (IMF) or the
Federal Deposit Insurance Corporation (FDIC).
Andrea M. Maechler and Kathleen M. McDill•
Working Paper 2003-7
November 2003
• Kathleen McDill is a Senior Financial Economist in the Division of Insurance and Research
of the Federal Deposit Insurance Corporation. Andrea Maechler is an Economist in the
Monetary and Financial Systems Department of the International Monetary Fund.
We are very grateful to Philip Bartholomew and Lynn Shibut for their insightful comments and
helpful discussions. The paper also benefited from valuable comments by Urs W. Birchler,
Jürg Blum, Hali Edison, Clemens Kool, Tonny Lybeck, and Philip Schellekens as well as by
participants in the 2003 Workshop on Banking and Finance organized jointly by the
Nederlandsche Bank and the Utrecht School of Economics. All errors are our own. The findings,
interpretations, and conclusions expressed in this paper are entirely those of the authors and do
not necessarily represent the views or policy of the International Monetary Fund (IMF) or the
Federal Deposit Insurance Corporation (FDIC).
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.
2
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.
2