Do Depositors Punish Banks for 'Bad' Behavior? Market Discipline in Argentina, Chile, and Mexico

53 Pages Posted: 19 Apr 1999

See all articles by Maria Soledad Martinez Peria

Maria Soledad Martinez Peria

International Monetary Fund (IMF)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Date Written: February 1999

Abstract

This paper examines the existence of market discipline in the banking industries of Argentina, Chile, and Mexico during the 1980s and 1990s. Using a bank panel data set, we test for the presence of market discipline by studying whether depositors punish risky banks by withdrawing their deposits. We find that across countries and across deposit insurance schemes, market discipline exists even among small, insured depositors. Standardized coefficients and variance decomposition of deposits indicate that bank fundamentals are at least as important as other factors affecting deposits. GMM estimations confirm that the results are robust to the potential endogeneity of bank fundamentals.

JEL Classification: G20, G21, E53, E58

Suggested Citation

Martinez Peria, Maria Soledad and Schmukler, Sergio, Do Depositors Punish Banks for 'Bad' Behavior? Market Discipline in Argentina, Chile, and Mexico (February 1999). World Bank Policy Research Paper No. 2058. Available at SSRN: https://ssrn.com/abstract=159989 or http://dx.doi.org/10.2139/ssrn.159989

Maria Soledad Martinez Peria

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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