Uninsured Deposits as a Source of Market Discipline: Some New Evidence

The experience of Continental Illinois National Bank has led many regulators to question the wisdom of the reliance on purchased funds in general and uninsured deposits in particular. Attention is focused on the proposition that certificate of deposit (CD) markets charge riskier banks higher rates....

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Veröffentlicht in:Economic perspectives (1989) 1986-09, Vol.10 (5), p.23
Hauptverfasser: Baer, Herbert, Brewer, Elijah
Format: Artikel
Sprache:eng
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Zusammenfassung:The experience of Continental Illinois National Bank has led many regulators to question the wisdom of the reliance on purchased funds in general and uninsured deposits in particular. Attention is focused on the proposition that certificate of deposit (CD) markets charge riskier banks higher rates. After discussing recent trends in reliance on uninsured deposits and summarizing evidence from previous investigations, the results of some recently completed research are presented. Data on daily stock prices and returns are obtained from Chase Econometrics and the CRSP database. Thirty-seven bank holding companies are included in the analysis. Twelve quarters of data, from the 4th quarter of 1979 to the 3rd quarter of 1982, were pooled, producing 144 observations. The results suggest that holders of uninsured CDs set risk premiums as if they are at least partially at risk. This leads to the imposition of market discipline, in a nondisruptive fashion, on large financial institutions that are most dependent on the money market for funding.
ISSN:1048-115X
2163-3584