Regulatory leniency and the cost of deposits

Michael Iselin; Allison Nicoletti; Jacob Ott; Haiwen Zhang

doi:10.1007/s11142-025-09894-4

Regulatory leniency and the cost of deposits

Michael Iselin¹; Allison Nicoletti^2,3; Jacob Ott⁴; Haiwen Zhang¹

¹ University of Minnesota · ² University of the Arts · ³ University of Pennsylvania · ⁴ Purdue University West Lafayette

Review of Accounting Studies 2025 open access

Abstract We examine whether variation in regulatory leniency is associated with the cost of deposits in the banking industry. We predict that lenient regulatory supervision allows for greater bank risk-taking due to delayed intervention, resulting in a higher cost of deposits. Our main finding is a positive association between banks’ cost of uninsured deposits and the leniency of their state regulators, incremental to observable measures of risk and performance. We further show that this result is stronger for riskier banks and when uninsured depositors have a greater ability or incentive to influence deposit rates. These findings suggest that the leniency of bank regulators is priced in uninsured deposit rates and further our understanding of the factors associated with regulatory leniency in the banking industry.

DOI: 10.1007/s11142-025-09894-4
Volume: 30 (4)
Pages: 3641-3676
Language: en
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