Seminar (Dept. of Finance)

Title: Once Bitten, Twice Shy: S&L Crisis Experience and Depositor Reaction to Default News

Speaker: Ya Kang, Assistant Professor, CUHK Business School, Chinese University of Hong Kong

Time: 10:00-11:30, Nov 5th, 2024 (Tuesday)

Venue: Room 1008, Mingde Business Building

Language: English/Chinese

ABSTRACT:

We investigate the impact of a banking crisis on the subsequent behavior of depositors.  Using a triple difference-in-differences research design that exploits the heterogeneous exposure of U.S. counties to the Savings and Loan (S&L) crisis and within-bank, across-region variation in uninsured deposit rates, we show that depositors in counties that were exposed to the S&L crisis are more responsive to bank client defaults and more likely to withdraw deposits from the exposed branch, leading to an increase in deposit rates. Using Edgar search data, we further document the heterogeneity in information acquisition by depositors due to their differing prior experiences in the S&L crisis.  In cross-sectional analyses, we show that the responses of the depositors are more pronounced when (1) they were more exposed to the S&L crisis, (2) the default events are more salient, (3) the bankrupt client is a relationship borrower, (4) the focal bank is riskier, and (5) depositors have the financial sophistication to monitor banks. Our findings help understand depositor behavior in banking crises by showing that prior exposure to a banking crisis makes depositors more sensitive to bank risk.