Market Discipline and Deposit Guarantee: Evidence from Australian Banks

46 Pages Posted: 27 Aug 2011 Last revised: 21 Nov 2011

See all articles by Xing Yan

Xing Yan

Monash University - Department of Banking and Finance

Michael T. Skully

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Katherine Avram

Monash University

Tram Vu

Monash University - Monash Business School - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2011

Abstract

This study examines market discipline in Australian banks and the impact of the 2008 Australian deposit guarantee scheme. Two forms of depositor market discipline were investigated – a quantity impact whereby an increase in bank risk leads to lower deposit volumes, and a price impact whereby an increase in bank risk leads to higher deposit interest rates. Using a random effects (RE) model with an unique unbalanced sample of 25 Australian banks over the period March 2002 to September 2010, market discipline was found at work in the Australian banking sector overall. Testing to see if there are differences between subcategories of banks: Major banks were found to be subject to a quantity impact but a price impact was not found, so there was only limited support for a “too big to fail” effect. We also examined whether the same level of market discipline applies to foreign and domestic banks, deposit quantity in foreign banks is more sensitive to capital risk than in domestic banks, foreign banks on average pay lower interest rates but their rates are less responsive to risk compared to domestic banks. Lastly, we investigated the effect of the introduction of a deposit guarantee in Australia, as expected, it has reduced depositor market discipline. These results are generally robust to various risk proxies and the system GMM estimator.

Keywords: Banks, Market discipline, Deposit quantity, Interest rate, Deposit guarantee

JEL Classification: G21, G28

Suggested Citation

Yan, Xing and Skully, Michael T. and Avram, Katherine and Vu, Tram, Market Discipline and Deposit Guarantee: Evidence from Australian Banks (August 20, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1917906 or http://dx.doi.org/10.2139/ssrn.1917906

Xing Yan (Contact Author)

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia
+61 3 99034077 (Phone)

Michael T. Skully

Monash University - Department of Banking and Finance ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
+61 3 9903 2407 (Phone)
+61 3 9903 1443 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Katherine Avram

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Tram Vu

Monash University - Monash Business School - Department of Banking and Finance ( email )

Melbourne
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
99
Abstract Views
797
rank
267,590
PlumX Metrics