Deposit Inflows And Outflows In Failing Banks: The Role Of Deposit Insurance
Speaker(s) Professor Manju Puri, Duke University Publication CAFRAL Conference room on Mezzanine Floor, Main Building. Reserve Bank of India, Fort, Mumbai 400 001

Using unique, daily, account-level balances data we investigate deposit stability and the drivers of deposit out flows and inflows in a distressed bank. We observe an out ow (run-o) of uninsured depositors from the bank following bad regulatory news. We find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the out ow of deposits. We also characterize which accounts are more stable (e.g., checking accounts and older accounts). We further provide important new evidence that, simultaneous with the run-o, gross funding inflows (run-in) are large and of first-order impact | a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely o set with new insured deposits as the bank approached failure. We show our results hold more generally using a large sample 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, raising the importance of other mechanisms of restricting bank risk taking, including prudent supervision.