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Bank Deposits

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Commonwealth Hall B
Hosted By: American Finance Association
  • Chair: Amiyatosh Purnanandam, University of Michigan

The Cross Section of Bank Value

Mark Egan
,
Harvard University
Stefan Lewellen
,
London Business School
Adi Sunderam
,
Harvard University

Abstract

We study the determinants of value creation within U.S. commercial banks. We begin by constructing two new measures of bank productivity: one focused on deposit-taking productivity and one focused on asset productivity. We then use these measures to evaluate the cross-section of bank value. Consistent with theories of safe-asset production, we find that variation in deposit productivity is responsible for the majority of variation in bank value. We also find evidence consistent with synergies between deposit-taking and lending activities: banks with high deposit productivity have high asset productivity, a relationship driven by the tendency of deposit-productive banks to hold illiquid loans. Our results suggest that both sides of the balance sheet contribute meaningfully to bank value creation, with the liability side playing a primary role.

On Deposit Stability in Failing Banks

Christopher Martin
,
Federal Deposit Insurance Corporation
Manju Puri
,
Duke University
Alexander Ufier
,
Federal Deposit Insurance Corporation

Abstract

We use a novel dataset from a US bank which failed after the financial crisis of 2007-2009 to study depositor behavior in distressed banks. Using daily, account-level balances we are able to investigate the drivers of deposit outflows. Among a variety of findings with regard to gross outflows, we find that uninsured depositors flee the bank following bad regulatory news. Government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures (e.g., the FDIC's Transaction Account Guarantee program), reduce the outflow of deposits and meaningfully improve deposit stability. We further provide important new evidence that in the presence of government guarantees, gross funding inflows (run-in) are of first order impact even in distressed banks. Losses of uninsured deposits are largely offset with new insured deposits as the bank approached failure. We generalize our results on deposit inflows using data from a panel of banks that faced regulatory action. Our results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability.

Tax Effects on Bank Liability Structure

Leonardo Gambacorta
,
Bank for International Settlements
Giacomo Ricotti
,
Bank of Italy
Suresh Sundaresan
,
Columbia University
Zhenyu Wang
,
Kelley School of Business, Indiana University at Bloomington

Abstract

Using the supervisory data on Italian Mutual Banks (CCB) and the historical changes in the Italian IRAP tax rates, we show that reductions in tax rates lead the banks to reduce their nondeposit liabilities more than their deposits. This evidence is consistent with the predictions of our dynamic structural model, in which the banks optimally balance deposit insurance premium, tax advantages of debt, and liquidity services with potential costs of bank closure. Our empirical identification of the tax effects takes advantage of the business restrictions of the CCBs and the exogenous variations in the IRAP rates across regions and over time. We also find evidence that a cut in the IRAP rates is associated with a drop in the cost of non-equity funding in the CCBs. In addition, we find that the CCBs trim the proportion of risky loans in their assets when they increase the proportion of the total credit in response to a tax cut.

Monetary Policy Transmission and the Funding Structure of Banks

Emily Williams
,
London Business School

Abstract

I document size-related financing frictions at U.S. commercial banks and show that these frictions lead to a reduction in bank lending when the Federal Reserve raises interest rates. I identify these effects by exploiting a natural experiment using anti-trust related bank branch divestitures in which branches are divested from large banks to small banks such that the market structure remains unchanged. Consistent with the existence of financing frictions in a framework where deposit demand is a function of the opportunity cost of money, I find that deposit rates increase more and deposit quantities decrease less at divested branches when the Federal Funds rate increases. I further find that these size-related financing frictions affect lending and real outcomes: when the Federal Reserve raises rates by 0.5%, small business lending declines by 1.5% more in areas with branches newly owned by small banks -which translates to a reduction in total lending at small banks of approximately 0.9% - and growth in the number of small businesses declines. Collectively, these results are consistent with the existence of a bank lending channel of monetary policy transmission.
Discussant(s)
Philip Strahan
,
Boston College
Philipp Schnabl
,
New York University
Taylor Begley
,
Washington University-St. Louis
Erik Gilje
,
University of Pennsylvania
JEL Classifications
  • G2 - Financial Institutions and Services