Using a sample of U.S. commercial banks from 2009 to 2022, we find that the flow of non-core deposits, rather than that of core deposits, becomes more sensitive to bank performance as banks receive increased attention on Twitter. This effect is particularly pronounced during periods of poor bank performance, when Twitter discussions are more influential, and for banks with more liquidity mismatch. Our results suggest that social media, rather than merely disseminating information about bank performance, makes depositors aware of their peers’ attention to banks, thereby intensifying the sensitivity of deposit outflows to weak fundamentals.

Financial repression—regulating interest rates below the laissez-faire equilibrium—has historically impeded investment in developing economies. In China, bank deposits were long subject to binding interest rate caps. Using transaction and local penetration data from a leading FinTech payment company, we study the FinTech’s introduction of a money market fund (MMF) with deposit-like withdrawal features but uncapped interest rates aids in interest rate liberalization. In aggregate, MMF assets grow rapidly, and banks whose deposit base was more exposed to the payment app see greater outflows. These outflows are concentrated in household demand deposits, for which the MMF is the closest substitute. Contrary to regulator concerns, exposed bank profitability does not decline. Rather, exposed banks invest more in financial innovation and are more likely to launch competing funds with similar features. Our results highlight how FinTech competition stimulates interest rate liberalization among traditional banks by introducing competition for funding.

Soft budget constraint refers to the situation where an economic entity expects to obtain economic assistance when in financial difficulties. During the past decade, a sizable literature has accumulated explaining the causes and consequences of the soft budget constraint. Many of the theories have traced soft budget constraint on enterprises to that on banks. However, why do banks often face soft budget constraint? How to mitigate the resulting problems? In this paper, we first show that owing to their special financial structure, banks as market institutions intrinsically face hard budget constraint and nevertheless remain stable and effective. Since banks’ finance mostly comes from deposits, it is very difficult for banks to be refinanced when their investment projects are unsuccessful due to the sequential service arrangement for bank deposits. This limitation hardens the budget constraint on banks and disciplines bankers’ investment decisions. However, the advent of instantaneous-social-welfareminded modern governments, which have both the resources and the incentives to bail out failing banks, gives rise to the soft budget constraint of banks. This causes bankers’ moral hazard problems. As an institutional solution to the resulting banking instabilities, banking regulation emerged in order to restrict banks’ investment decisions. We provide historical evidence on the genesis and symptoms of, and institutional solution to the soft budget constraint of banks over the past six hundred years to support our theory. We also conduct contemporary econometric analysis to show how the lack of government commitment to a hard budget constraint gives rise to a strict banking regulation. We further explore the predictions of our theory in the paper.