Do Banks Worry about Attentive Depositors? Evidence from Multiple-Brand Banks
Matthieu Chavaz, Pablo Slutzky
Review of Finance, Volume 28, Issue 1, January 2024, Pages 353–388, https://doi.org/10.1093/rof/rfad018
Recent events at Silicon Valley Bank and Credit Suisse have raised questions about the impact of sudden shifts in depositors’ attention towards banks. While “unfounded fears” among depositors have been known to be a source of bank fragility since at least Ricardo (1817), empirically identifying the impact of depositors’ attention on banks and isolating this effect from that of changes in fundamentals is particularly challenging.
In this paper, we examine how banks respond to surges in attention by retail depositors. We address the key identification challenge with three key ideas. First, we proxy for public attention to banks by tracking online searches for UK banks. Second, we exploit the fact that most large UK banks offer retail deposits using multiple brands. Since these brands are not separate legal entities such as subsidiaries, the fundamental risk to depositors cannot vary across brands of the same bank. However, since banks use brand-specific marketing strategies, depositors’ attention and risk perceptions can vary across these brands. This disconnect allows us to test how deposit rates respond to attention while controlling for fundamentals by including bank-week fixed effects. Third, most large banks offer similar deposits to UK customers onshore and in UK Crown Dependencies (offshore). Since these jurisdictions introduced deposit insurance in a staggered way between 2008 and 2010, we can study how the interest rate for the same deposit product offered by the same brand responds to surges in online search volume depending on insurance coverage.
To examine how banks respond to surges in attention, we use a weekly dataset collected by Moneyfacts covering deposit rates offered by UK deposit-taking brands from 2007 to 2014. We find that banks/brands facing a two standard deviation spike in depositor attention increase deposit rates by 16 basis points, an increase equivalent to 20% of banks’ average interest margin in 2008 and 78% of the median deposit rate in the aftermath of the GFC. The response remains statistically significant when we exploit variation across brands of the same bank by including bank-week fixed effects; in other words, banks respond to surges in attention above and beyond what can be explained by fundamentals. In line with the idea that banks attempt to retain panicky depositors at times of high uncertainty, our main finding is only significant for deposits without withdrawal restrictions and during the global financial crisis. In addition, comparing onshore and offshore deposits by the same brand, we show that banks’ response is substantially stronger when the absence of deposit insurance and a larger presence of wholesale depositors magnifies potential losses to depositors.
Overall, our results point to a previously undocumented source of bank fragility: banks raise deposit rates and erode their profitability in response to spikes in public attention, even when this attention is not driven by changes in fundamental factors and despite the presence of deposit insurance.