Banks face struggle to recover customers lost during financial crisis

Professor Rajkamal IyerProfessor Rajkamal Iyer

Regaining depositors important not just to banks, but to economy, says MIT Sloan expert

CAMBRIDGE, Mass., Nov. 5, 2009 — The financial crisis may have eased, but many banks, especially smaller ones, face a continuing challenge to regain lost customers, a task that is important not just for the banks, but for the overall economy, according to MIT Sloan School of Management Assistant Professor of Finance Rajkamal Iyer.

Iyer, who has researched bank depositor behavior, found that during the crisis, many customers flee from smaller, seemingly fragile banks in favor of larger, national institutions. “When a bank, especially a small commercial bank, loses such depositors, it may need to cut back on loans, which in turn means that small businesses that have a banking relationship with that bank suffer as they might find it difficult to raise credit from other sources,” he said. “Even if a bank doesn’t face failure, this shift in deposits could mean a real and ongoing cost to the economy.”

Regaining such customers can be difficult. “If depositors have incurred all the cost and difficulty of moving to another bank, they generally don’t want to come back,” says Iyer. Recent research by Iyer and colleagues found that deposit insurance “is only partially effective” when it comes to helping banks regain depositor trust and business. Another effective way, Iyer says, is for banks to offer depositors a wide range of products and services.

“Our research finds that the length and depth of relationships between depositors and their banks can act as a dampening factor on the depositors’ propensity to run” to another institution, he says. “Solid and varied relationships with depositors can help banks reduce their financial fragility during difficult times. And maintaining such relationships can be very important to local economies.”

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