BANKING RESEARCH OVERVIEW







BANKING RESEARCH OVERVIEW


MATT BRIGIDA

Associate Professor of Finance (SUNY Polytechnic Institute)

The Determinants of Uninsured Deposits

2023 Regional Banking Crisis

Unlike 2008, the 2023 crisis was driven by the effect of interest rate risk on uninsured deposits

This panel-data analysis investigates the factors affecting bank-quarter level amounts on uninsured deposits.

Recent Research

Jiang et al (2003) investigate the use of interest rate hedges around the 2022 interest rate increases. They find about 25% of banks use interest rate swaps, however they only hedge 4% of assets on average.

Recent Research

Chang et al (2003) find banks with higher levels of uninsured deposits were riskier before the 2023 crisis.

Hypotheses

  1. Interest rate hedging via swaps and options is increasing in uninsured deposits.
  2. Equity is increasing in uninsured deposits.

Data

I use FDIC quarterly Call report data downloaded via the FDIC Bankfind API.

Data from 2002 through 2023.

Results

  • Uninsured deposits are increasing in bank equity
  • Generally, uninsured deposits are increasing in option use
  • IRS are unrelated to uninsured deposits

Other Results

  • Uninsured deposits are decreasing in loan losses
  • Total Loans/Leases are inversely related to uninsured deposits
  • Wholesale funding costs are positively related to uninsured deposits

Other Results

  • Uninsured deposits were lower during the 2008 financial crisis, post-crisis, and COVID crisis periods
  • De Novo banks use more uninsured deposits

Time-Varying Income and Expense Betas

It has been commonly thought banks are necessarily exposed to interest rate risk.

Recent research found evidence that the deposit franchise hedges interest rate risk in bank assets.

The Deposit Franchise

The bank's investment in buildings, IT, advertising, and salaries allows it to pay depositors:

$$r^d_t = \beta^{Dep} f_t$$

where $r^d_t$ is the deposit rate, $f_t$ is the short-rate (fed funds) and $\beta^{Dep} \in (0,1)$. $\beta^{Dep}$ is the Deposit Beta

$IntInc_{dt} = \alpha^{Inc}_{d,t} + \beta^{Inc}_{d,0,t} FedFunds_{t} +$

$+ \beta^{Inc}_{d,1,t} FedFunds_{t-1} + \epsilon_{dt}$


and we report:


$\beta^{Inc}_{d,t} = \beta^{Inc}_{d,0,t} + \beta^{Inc}_{d,1,t}$

$IntExp_{dt} = \alpha^{Exp}_{d,t} + \beta^{Exp}_{d,0,t} FedFunds_{t} +$

$+ \beta^{Exp}_{d,1,t} FedFunds_{t-1} + \epsilon_{dt}$


and we report:


$\beta^{Exp}_{d,t} = \beta^{Exp}_{d,0,t} + \beta^{Exp}_{d,1,t}$

How well do banks match betas?

Future research on bank level betas

2023 Regional Bank Crisis in the Cross Section

Banking Data in Teaching

Financial Education Examples

Institutions and Corporate Finance

Investments and Portfolio Theory

Teaching Demo

Securitization