Deposit Withdrawals from Distressed Commercial Banks

We study retail deposit withdrawals from European commercial banks which incurred investment losses in the wake of the U.S. subprime crisis. We document a strong propensity of households to withdraw deposits from distressed banks, especially when a bank receives a public bailout. However, the withdrawal risk for a distressed bank is mitigated by strong bank-client relationships and household-level switching costs: Households which rely on a single deposit account, which do not live close to a non-distressed bank, or which maintain a credit relationship with a distressed bank are significantly less likely to withdraw deposits. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.