From research: Depositors and banks’ discretionary behaviour

How depositors respond to banks’ discretionary behaviours? Financial institutions have significantly sophisticated in last decades, presenting challenges for regulatory authorities due to major information asymmetry in the financial ecosystem. In a paper published by prof. D. K. Nguyen on behalf of VŠE and his team in the International Review of Financial Analysis journal, they investigated depositors’ responsiveness to banks’ discretionary behaviours.

In the large-scale comprehensive study, robust dataset on discretionary behaviours by US’ commercial banks was analysed. Findings suggest evidence of market discipline across insured and uninsured depositors, documenting higher deposit rates for banks engaging more in earnings management.

Furthermore, depositors monitor discretionary behaviours to a greater extend before and during financial crises. However, this vigilance becomes less intensive after a crisis. It was further observed that depositors’ monitoring transcend bank size distinctions, although larger institutions appear to be scrutinized more profoundly.

Read further about implications of this study for diverse spectrum of stakeholders, including bank managers, regulatory authorities and policy makers at: https://www.sciencedirect.com/science/article/pii/S1057521924001376?via%3Dihub