Do Corporate Depositors Risk Everything for Nothing?

The Importance of Deposit Relationships, Interest Rates and Bank Risk

Daniel Friedmann, Björn Imbierowicz, Anthony Saunders, Sascha Steffen

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.
Original languageEnglish
Publication date2017
Number of pages58
Publication statusPublished - 2017
EventThe 44th European Finance Association Annual Meeting (EFA 2017) - University of Mannheim, Mannheim, Germany
Duration: 23 Aug 201726 Aug 2017
Conference number: 44
https://www.conftool.com/efa2017/

Conference

ConferenceThe 44th European Finance Association Annual Meeting (EFA 2017)
Number44
LocationUniversity of Mannheim
CountryGermany
CityMannheim
Period23/08/201726/08/2017
Internet address

Keywords

  • Auctions
  • Corporate deposits
  • Financial crisis
  • Banking crisis
  • Relationship

Cite this

Friedmann, D., Imbierowicz, B., Saunders, A., & Steffen, S. (2017). Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk. Paper presented at The 44th European Finance Association Annual Meeting (EFA 2017), Mannheim, Germany.
Friedmann, Daniel ; Imbierowicz, Björn ; Saunders, Anthony ; Steffen, Sascha. / Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk. Paper presented at The 44th European Finance Association Annual Meeting (EFA 2017), Mannheim, Germany.58 p.
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Friedmann, D, Imbierowicz, B, Saunders, A & Steffen, S 2017, 'Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk' Paper presented at, Mannheim, Germany, 23/08/2017 - 26/08/2017, .

Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk. / Friedmann, Daniel; Imbierowicz, Björn; Saunders, Anthony; Steffen, Sascha.

2017. Paper presented at The 44th European Finance Association Annual Meeting (EFA 2017), Mannheim, Germany.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Do Corporate Depositors Risk Everything for Nothing?

T2 - The Importance of Deposit Relationships, Interest Rates and Bank Risk

AU - Friedmann, Daniel

AU - Imbierowicz, Björn

AU - Saunders, Anthony

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PY - 2017

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N2 - We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.

AB - We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.

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KW - Corporate deposits

KW - Financial crisis

KW - Banking crisis

KW - Relationship

KW - Auctions

KW - Corporate deposits

KW - Financial crisis

KW - Banking crisis

KW - Relationship

M3 - Paper

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Friedmann D, Imbierowicz B, Saunders A, Steffen S. Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk. 2017. Paper presented at The 44th European Finance Association Annual Meeting (EFA 2017), Mannheim, Germany.