Do Depositors Discipline Banks and Did Government Actions During the Recent Crisis Reduce this Discipline? An International Perspective
Allen N. Berger
University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; Tilburg University - CentER
Rima Turk Ariss
Lebanese American University
May 17, 2013
The recent financial crisis highlights the importance of both regulatory and market discipline. Government reactions to the crisis included expanding deposit insurance coverage and rescuing troubled institutions, including some institutions that might not otherwise be considered too important to fail. These actions may have the unintended consequence of a reduction in market discipline that might otherwise penalize banks for risk-taking behavior. To address this issue, we first test for the presence of depositor discipline effects in the period leading up to the financial crisis in both the US and the EU. Second, we test whether depositor discipline declined during and after the crisis. We find significant depositor discipline prior to the crisis in both the US and EU, but this varies between the US and the EU as well as with banking organization size and with listed versus unlisted status. We also find that the data are consistent with the hypothesis that depositor discipline declined during and after the crisis as a result of the government actions.
Number of Pages in PDF File: 45
Keywords: Market Discipline, Depositor Discipline, Banks
JEL Classification: G21, G28working papers series
Date posted: November 11, 2010 ; Last revised: May 18, 2013
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