Regulatory leniency and the cost of deposits

Michael Iselin, Allison Nicoletti (), Jacob Ott and Haiwen Helen Zhang
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Michael Iselin: University of Minnesota Carlson School of Management
Allison Nicoletti: University of Pennsylvania The Wharton School
Jacob Ott: Purdue University Mitch Daniels School of Business
Haiwen Helen Zhang: University of Minnesota Carlson School of Management

Review of Accounting Studies, 2025, vol. 30, issue 4, No 14, 3676 pages

Abstract: Abstract We examine whether variation in regulatory leniency is associated with the cost of deposits in the banking industry. We predict that lenient regulatory supervision allows for greater bank risk-taking due to delayed intervention, resulting in a higher cost of deposits. Our main finding is a positive association between banks’ cost of uninsured deposits and the leniency of their state regulators, incremental to observable measures of risk and performance. We further show that this result is stronger for riskier banks and when uninsured depositors have a greater ability or incentive to influence deposit rates. These findings suggest that the leniency of bank regulators is priced in uninsured deposit rates and further our understanding of the factors associated with regulatory leniency in the banking industry.

Keywords: Banks; Regulatory leniency; Cost of deposits (search for similar items in EconPapers)
JEL-codes: E43 G21 M40 M48 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-025-09894-4

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