Depositor Behavior and Market Discipline in Colombia
34 Pages Posted: 4 May 2001
Date Written: December 2000
This study examines how depositors choose among different banks and over time in Colombia, focusing on whether they discipline bank behavior. By controlling for a more comprehensive set of risk/return factors, the study improves upon conventional market discipline tests. Panel data estimations for 1985-99 show that depositors prefer banks with stronger fundamentals, and that banks tend to improve their fundamentals after being "punished" by depositors. Banks with stronger fundamentals benefit from lower interest costs and higher lending rates. Market (or "regulatory") discipline therefore appears to exist in Colombia, perhaps thanks to certain key design features of the deposit insurance scheme.
Keywords: Banking system, market discipline, deposit insurance, Colombia
JEL Classification: G21
Suggested Citation: Suggested Citation