Market Discipline by Thrift Depositors

This paper tests for the presence of depositor discipline by examining the effect of depository institutions' risk on the pricing and growth of uninsured deposits. The study analyzes a large panel of thrifts that includes detailed information on interest rate schedules. This information allows the authors to develop a time-consistent risk profile for thrifts. Their empirical findings support the presence of market discipline. Riskier banks are found to pay higher interest rates but attract smaller amounts of uninsured deposits. The authors also find that qualitative results are similar for fully insured deposits, although statistical significance is substantially lower.