Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises
Posted: 8 Dec 2000
This paper empirically investigates two issues largely unexplored by the literature on market discipline. We evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline. We focus on the experiences of Argentina, Chile, and Mexico during the 1980s and 1990s. We find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates. Deposit insurance does not appear to diminish the extent of market discipline. Aggregate shocks affect deposits and interest rates during crises, regardless of bank fundamentals; while investors' responsiveness to bank risk taking increases in the aftermath of crises.
Keywords: Market discipline, banking, banking crises, deposit insurance
JEL Classification: G20, G21, E53, E58
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