Authors: Manthos Delis, Panagiotis Staikouras, Christos Tsoumas

Title: Supervisory enforcement actions and depositors’ reaction: Monitoring, running, or living a quiet life?

Abstract

Public announcement of formal enforcement actions against banks for safety and soundness reasons may enhance effective depositor monitoring or cause depositors to overreact, leading to disruptive runs. We test these competing hypotheses, using hand-collected data on enforcement actions and bank-quarter or branch-year data on deposits and other bank characteristics from 2000 through 2014. Our baseline results show that total deposits at punished banks decrease by 9.5% in the post-enforcement year, with uninsured deposits declining by 20% and insured deposits falling by 7.9%. We also find no evidence of post-enforcement, negative spillover effects on bank deposits in the local banking market. These findings highlight that enforcement actions’ announcement enhance rational depositor monitoring over and above punished banks’ financial condition.