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Do Depositors Care About Enforcement Actions?

Since 1990, federal bank supervisors have publicly announced formal enforcement actions. This change in regime provides a natural laboratory to test two propositions: (1) claims by economists that putting confidential supervisory information in the public domain will enhance market discipline and (2) claims by bank supervisors that releasing such data will spark runs. To evaluate these propositions, we measure depositor reaction to 87 Federal Reserve announcements of enforcement actions. We compare deposit growth rates and yield spreads before and after the announcements at the sample banks and a control group of peer banks. The data show no evidence of unusual deposit withdrawals or spread increases at the sample banks following the announcements of formal actions. These results suggest that public announcements of enforcement actions did not spark bank runs or enhance depositor discipline. Apparently, depositors did not care a great deal about our sample actions.

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