Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises

Posted: 8 Dec 2000

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)

Abstract

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

Suggested Citation

Martinez Peria, Maria Soledad and Schmukler, Sergio, Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises. Journal of Finance, Vol. 56, No. 3, June 2001. Available at SSRN: https://ssrn.com/abstract=249634

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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