paying attention to banks: evidence from offshore deposits · paying attention to banks: evidence...
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![Page 1: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/1.jpg)
Paying Attention to Banks: Evidence from Offshore Deposits
Matthieu Chavaz (Bank of England)Pablo Slutzky (University of Maryland)
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of the Bank of England
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Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
![Page 3: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/3.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
![Page 4: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/4.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
Insured depositors never monitor, uninsured always do
Time varying attention
![Page 5: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/5.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
Insured depositors never monitor, uninsured always do
Time varying attention
![Page 6: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/6.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
![Page 7: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/7.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
![Page 8: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/8.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
![Page 9: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/9.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
Assumptions What we do
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
Insured depositors never monitor, uninsured always do
Time varying attention
Frictionless deposit insurance Frictions (payout lag)
Deposit insurance coverage is understood Limited awareness
![Page 10: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/10.jpg)
Research Questions
1. Do depositors monitor banks?
2. Do depositors discipline banks?
3. Does deposit insurance affect monitoring and discipline?
– How to measure attention?• Use Google Search volumes (Da et al JF 2011)
– How to assess the role of deposit insurance?• Exploit a peculiarity of the UK banking system
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Roadmap
1. Attention and market discipline
a) Deposit flows
b) Deposit rates
2. Deposit insurance, attention, and market discipline
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Attention and market discipline
• Search volume for each bank name by UK individuals (Barclays, Lloyds, etc.)
𝐴𝑏𝑛𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡 = log 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦𝑖,𝑡 − log(𝑀𝑒𝑑𝑖𝑎𝑛𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦𝑖,𝑡−1;𝑡−4)
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MARKET DISCIPLINE: DEPOSIT FLOWS
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Market Discipline: Deposit Flows
1. Funding liquidity risk
Stable funding = Individual Deposits/Total Liabilities
Best predictor of failure (Mio, 2015)
2. Solvency risk
Capitalisation=Tier 1 Capital/Total Liabilities
∆𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠𝑖,𝑡= 𝛽1 𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡−1+𝛽2𝑅𝑖𝑠𝑘𝑖,𝑡−1 +𝛽3𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡−1𝑥 𝑅𝑖𝑠𝑘𝑖,𝑡−1 +
𝐵𝑎𝑛𝑘𝑖 +𝑀𝑜𝑛𝑡ℎ𝑡 + 𝜀𝑖,𝑡
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Market Discipline: Deposit Flows
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Market Discipline: Deposit Flows
Banks lose deposits when attention increases
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Market Discipline: Deposit Flows
Banks lose deposits when attention increases
The effect is stronger for riskier banks
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Market Discipline: Deposit Flows
Banks lose deposits when attention increases
The effect is stronger for riskier banks
This effect is driven by retail depositors only
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MARKET DISCIPLINE: DEPOSIT RATES
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Market Discipline: Deposit Rates• Deposit rates data from all UK
banks (240)
• Daily frequency
• Detailed product characteristics
(41,000 deposit products)
• Classify deposits into ~400 unique
product categories
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Market Discipline: Deposit Rates
• γi,j Bank-jurisdiction fixed effects
• θ𝑝,𝑡 Product-time fixed effects
𝑅𝑎𝑡𝑒𝑝,𝑖,𝑗,𝑡 = 𝛽1σ𝑙=14 𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡+ 𝛽2 𝑅𝑖𝑠𝑘𝑖,𝑡−1+ 𝛽3σ𝑙=1
4 𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡 𝑥 𝑅𝑖𝑠𝑘𝑖,𝑡−1 + γ𝑖,𝑗 + θ𝑝,𝑡 + 𝜀𝑝,𝑖,𝑗,𝑡
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Market Discipline: Deposit Rates
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Market Discipline: Deposit Rates
Market discipline does not work on average1. Solvency is priced, but wrong sign (Ben-David et al 2017)2. Liquidity risk not priced
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Market Discipline: Deposit Rates
Market discipline does not work on average1. Solvency is priced, but wrong sign (Ben-David et al 2017)2. Liquidity risk not priced
![Page 25: Paying Attention to Banks: Evidence from Offshore Deposits · Paying Attention to Banks: Evidence from Offshore Deposits Matthieu Chavaz (Bank of England) Pablo Slutzky (University](https://reader033.vdocuments.us/reader033/viewer/2022042313/5edf8085ad6a402d666ad84d/html5/thumbnails/25.jpg)
Market Discipline: Deposit Rates
Market discipline does not work on average1. Solvency is priced, but wrong sign (Ben-David et al 2017)2. Liquidity risk not priced
Attention triggers market discipline
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Supply of Information
• UK newspapers coverage
• Financial markets: CDS spreads
𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒𝑖,𝑡 = 𝑀𝑒𝑎𝑛 𝐴𝑟𝑡𝑖𝑐𝑙𝑒 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑖𝑡𝑦𝑖,𝑡 ∗ )#(𝐴𝑟𝑡𝑖𝑐𝑙𝑒𝑠 𝑖,𝑡
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Market Discipline: Deposit Rates
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Market Discipline: Deposit Rates
Supply of information does not affect market discipline
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Market Discipline: Deposit Rates
Supply of information does not affect market discipline
Attention to banks does
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THE ROLE OF DEPOSIT INSURANCE
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Offshore centers
• Many UK banks offer same product in Crown dependencies
• Isle of Man; Guernsey; Jersey
• Comparable environment
• Currency; citizens; laws
• Despite self-governing
• Onshore / offshore depositors face same bank risk
• But different deposit insurance
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Offshore depositors
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Offshore depositors
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Offshore depositors
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Offshore depositors
• 85% of deposits in the Isle of Man held by retail customers• 69% of depositors in the Isle of Man have balances under £20,000
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Offshore deposit insurance
• Pre-crisis: none
• Post-crisis: £50,000 per qualifying deposit
• But limited credibility:“...in the event of a very large covered bank failing, or in a systemic crisis, the Deposit Compensation Scheme
is unlikely to be in a position to provide the full amount of compensation due to you in a timely manner.”
– £100 Million payout cap (~0.1% of total balances)
– ex-post funding
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Offshore deposit insurance
• Pre-crisis: none
• Post-crisis: £50,000 per qualifying deposit
• But limited credibility:“...in the event of a very large covered bank failing, or in a systemic crisis, the Deposit Compensation Scheme
is unlikely to be in a position to provide the full amount of compensation due to you in a timely manner.”
– £100 Million payout cap (~0.1% of total balances)
– ex-post funding
𝑅𝑎𝑡𝑒𝑝,𝑖,𝑗,𝑡 = 𝛽1σ𝑙=14 𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡+ 𝛽2 𝑅𝑖𝑠𝑘𝑖,𝑡−1+ 𝛽3σ𝑙=1
4 𝐴𝑡𝑡𝑒𝑛𝑡𝑖𝑜𝑛𝑖,𝑡 𝑥 𝑅𝑖𝑠𝑘𝑖,𝑡−1 + γ𝑖,𝑗 + θ𝑝,𝑡 + 𝜀𝑝,𝑖,𝑗,𝑡
Offshore
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Deposit Insurance
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Deposit Insurance
Find no evidence of market discipline for liquidity risk
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Deposit Insurance
Find no evidence of market discipline for liquidity risk
Both onshore and offshore
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Deposit Insurance
Find no evidence of market discipline for liquidity risk
Both onshore and offshore
However, with attention, discipline for onshore accounts
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Deposit Insurance
Find no evidence of market discipline for liquidity risk
Both onshore and offshore
However, with attention, discipline for onshore accounts
The effect is stronger for offshore accounts
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Sophistication
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Sophistication
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Summary
• First paper to incorporate attention to banks, intermittent monitoring
• Active attention is necessary for banks to be disciplined
– Maybe why inconclusive results so far
• Discipline stronger with weak deposit insurance scheme
• Discipline even in the presence of an almost frictionless insurance scheme
• Frictions
• Disclosure
• Attention
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