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Deposit Withdrawals from Distressed Commercial Banks: The Importance of Switching Costs

Martin Brown (), Benjamin Guin and Stefan Morkoetter

No 1319, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We study retail deposit withdrawals from commercial banks which were differentially exposed to distress during the 2007-2009 financial crisis. We show that the propensity of households to withdraw deposits increases with the severity of bank distress. Withdrawal risk is, however, substantially mitigated by strong bank-client relationships. Considering the most distressed bank in our sample, 23 percent of its clients shifted deposits away from the bank during the crisis. Our estimates suggest that this withdrawal risk is eliminated if a client banked exclusively with this financial institution before the crisis, and is more than halved if the client had a mortgage with this bank. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.

Keywords: Liquidity Risk; Relationship Banking; Market Discipline (search for similar items in EconPapers)
JEL-codes: D14 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ias
Date: 2013-11, Revised 2017-12
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2013:19

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