Bank Quality, Loan Demand and Market Discipline
Emerging Markets Finance and Trade Vol. 50, Issue 4, pp. 61-72, 2014
33 Pages Posted: 4 Nov 2016
Date Written: September 3, 2013
In this paper, the disciplining role of borrowers towards risky banks is examined in a multi-period setting. In the theoretical model, it is shown that borrowers choose to pay high interest rates to the banks that are perceived as less risky, in order to minimize possible liquidity problems. We hypothesize that borrowers can punish banks with deteriorating fundamentals by reducing their loan demand. Using panel data from Turkish private commercial banks, we find that as the riskiness of a bank increases, its loan demand declines significantly. This disciplinary reaction is shown to be more effective especially towards small banks.
Keywords: Market Discipline, Loan Demand, Bank Risk
JEL Classification: G21
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