This study compares what’s different about depositor discipline on ‘surviving savings banks’ and ‘failed savings banks’, and how each group respond to the disciplinary action of depositors. For the analysis of depositor behaviors, this study utilizes the daily balances and transaction records of individual depositors for six months before the banks had their businesses suspended. The analysis showed the followings: 1) The deposits in the surviving savings banks decreased when the banks faced higher management risks indicated by declining BIS capital adequacy ratios or increased NPL ratios, which shows strong presence of depositor discipline; 2) The deposits in the failing savings banks, on the other hand, continued to increase even when the banks faced higher management risks indicated by increased NPL ratios, which points to weaker market discipline by depositors. In addition, deposits exceeding the deposit coverage limit (uninsured deposits) were more sensitive to management risks faced by savings banks than insured deposits, and subject to stronger depositor discipline. Also, while surviving savings banks responded to deposit withdrawals by lowering their NPL ratios and raising their BIS capital adequacy ratios, failing savings banks attempted to improve their deteriorating condition only by adjusting their BIS capital adequacy ratios, without adjusting their NPL ratios. This finding suggests that surviving savings banks had better follow-up management practices than failed banks. For six months leading up to suspension of business, uninsured deposits were withdrawn at a faster pace than insured deposits; until one month to suspension, the cumulative decreasing rate of uninsured deposits were seven times as high as that of insured deposits. Also, it was confirmed that a substantial inflow of insured deposits from new depositors were made until the last minute before the suspension of business. From the above findings, it can be inferred that failing savings banks aggressively pulled in insured deposits, thereby weakening depositor discipline. Lastly, this study analyzed the logit failure prediction model and reached the conclusion that deposit-related indicators may be used as important explanatory variables that can supplement the existing CAEL financial factors.

Keywords: Savings Banks, Market Discipline, Depositor Behavior, Failure Prediction, Deposit Insurance

JEL Classification: G21, G28