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

See all articles by Zeynep Onder

Zeynep Onder

Bilkent University - Faculty of Business Administration

Suheyla Ozyildirim

Bilkent University - Faculty of Business Administration

Date Written: September 3, 2013

Abstract

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

Suggested Citation

Onder, Zeynep and Ozyildirim, Suheyla, Bank Quality, Loan Demand and Market Discipline (September 3, 2013). Emerging Markets Finance and Trade Vol. 50, Issue 4, pp. 61-72, 2014, Available at SSRN: https://ssrn.com/abstract=2863685 or http://dx.doi.org/10.2139/ssrn.2863685

Zeynep Onder (Contact Author)

Bilkent University - Faculty of Business Administration ( email )

06533 Bilkent, Ankara
Turkey
(90)(312) 290 2038 (Phone)
(90)(312) 266 4958 (Fax)

Suheyla Ozyildirim

Bilkent University - Faculty of Business Administration ( email )

06800 Bilkent, Ankara
Turkey

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
25
Abstract Views
352
PlumX Metrics