Funding Advantage and Market Discipline in the Canadian Banking Sector

Determinants of Interest Rates on Time Deposits and Savings Accounts: Macro Factors, Bank Risk, and Account Features

“…They study Canadian banks and find for this period that bank‐specific risk factors lose their importance in explaining deposit rates, which they attribute to a greater market awareness of government guarantees for potentially failing banks. These results cannot be generalized to other countries per se, because Canada “has no history of government bailouts” (Beyhaghi et al : 396) and did not experience a bank failure during the 2007–2009 period. Stolz and Wedow () document government support measures in the USA and the EU countries and show that the financial sector in most countries is less robust than in Canada, possibly leading to greater concerns among depositors.…”

“…Another relatively small bank, DSB Bank, failed in 2009, and the fourth largest bank SNS Reaal was nationalized in 2013. The Dutch market can therefore be regarded as a different setting than that in the work of Beyhaghi et al () as depositors have been confronted with failing banks. Hence, our paper provides an alternative channel how a crisis can affect depositor behavior.…”

“…Market discipline refers to the process in which debtholders, such as depositors, require higher returns when the probability increases that they incur losses in case of, for example, a bank default. In general, bank risk and the deposit rate are positively related (e.g., Park and Peristiani ; Mondschean and Opiela ; Martinez Peria and Schmukler ; Demirgüç‐Kunt and Huizinga ; Imai ; Murata and Hori ; Hori et al ; Beyhaghi et al ), despite the fact that deposit insurance weakens this relation (e.g., Mondschean and Opiela ; Demirgüç‐Kunt and Huizinga )…”

“…First, it is the first paper to study the effects of account‐specific variables – in conjunction with macro‐specific and bank‐specific variables – on the costs of deposits for banks. Second, the paper explains how the recent crisis has changed the sensitivity of deposit holders to bank risk taking in a setting where several banks were bailed out [contrary to the Canadian setting in the work of Beyhaghi et al ()]. To address these issues, we make use of a unique dataset, which comprises daily interest rates on all savings and time deposit products offered by 58 different banks to retail customers in the Netherlands.…”

Market‐based estimates of implicit government guarantees in European financial institutions

“…Senior debt is not explicitly insured by the government. However, the expectation is that senior creditors will be bailed out if a bank fails (namely, they enjoy implicit guarantees, see Demirguc‐Kunt and Huizinga, ; Beyhaghi, D'Souza, & Roberts, , among others). Although it is possible that subordinated debt is perceived as sharing the implicit protection from the bank safety net, Kwast et al ( ) note the special status of subordinated debt: ‘Among bank liabilities, [subordinated debt and debentures] (SND) are uninsured and among the first (after equity) to lose value in the event of bank failure.…”