Do Depositors Discipline Banks and Did Government Actions During the Recent Crisis Reduce this Discipline? An International Perspective

43 Pages Posted: 11 Nov 2010 Last revised: 9 Jul 2014

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: May 13, 2014

Abstract

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. Alternatively, market discipline may have increased during the crisis due to heightened awareness of the risks of bank failures. To address these issues, 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 decreased or increased during 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 depositor discipline mostly decreased during the crisis, except for the case of small US banks.

Keywords: Market Discipline, Depositor Discipline, Banks

JEL Classification: G21, G28

Suggested Citation

Berger, Allen N. and Turk-Ariss, Rima, Do Depositors Discipline Banks and Did Government Actions During the Recent Crisis Reduce this Discipline? An International Perspective (May 13, 2014). Journal of Financial Services Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1706901 or http://dx.doi.org/10.2139/ssrn.1706901

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
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803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Rima Turk-Ariss

International Monetary Fund ( email )

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

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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