No. 226: Banks’ Risk-Taking and Deposits Around Going Concern Opinions

We investigate banks’ risk-taking and deposit flows around first-time going concern opinions (GCOs). While GCOs may strengthen market monitoring, they are also often suspected of destabilizing banks by triggering depositor runs. Our evidence is difficult to reconcile with that concern. Uninsured deposits begin to decline several quarters before the GCO, while insured deposits increase over the same period, leaving total deposits broadly stable around the opinion. This pattern suggests that more sophisticated depositors respond to timelier information than the annual audit report and shift from uninsured to insured funding before the GCO becomes public, whereas insured retail depositors do not exhibit large-scale withdrawals around the GCO. We also document that bank risk measures rise in the quarters leading up to the GCO and then stabilize and subsequently decline after the opinion. In addition, severe enforcement actions become more likely in the post-GCO period. Taken together, these patterns are consistent with an indirect supervisory channel that may help interpret the post-GCO change in risk-taking. Overall, our findings suggest that concerns about GCOs precipitating depositor runs may be overstated in the banking setting and that systematic auditor forbearance is not clearly justified on financial stability grounds.