Supervisory Transparency and Depositor Diversity: Bank Oversight in Developing Economies

Abstract

We explore the implications of bank regulators in developing markets disclosing the adverse outcomes of their supervisory actions. We utilize branch-level data on the deposits of commercial banks in India to study depositors’ responses to the disclosure of significant regulatory penalties. We find that news of penalties on some banks leads depositors to lose trust in the banking system overall and withdraw funds from offending and neighboring banks. Furthermore, economic activity declines in regions that witness a decrease in deposits. We also explore heterogeneity in depositors’ responses and find that men respond to such monetary penalties by withdrawing their deposits, whereas women do not. However, relative to other women, those in matrilineal societies who are more empowered and manage household finances withdraw their deposits from troubled banks. These findings suggest that control of household finances is crucial to depositors’ reaction to negative news. Our study contributes to the literature on bank transparency and depositor heterogeneity and could inform regulators’ decisions to disclose the outcome of their supervisory efforts, especially in developing markets.