Depositor Behaviour and Market Discipline in Turkey
26 Pages Posted: 29 Jan 2004
Recent crises in emerging economies increase the importance of the governance of financial institutions. In addition to improved risk measurement techniques for capital regulation and bank supervision, market discipline is viewed as the third 'pillar' for prudential regulation and supervision. Calomiris and Kahn (1991) formally define market discipline as the depositors suspicious of the level of realised returns having the incentive to monitor the bank and withdraw their deposits. In this paper we empirically test the existence of market discipline imposed by the insured and uninsured depositors through the change in the level of deposits and the interest rate paid to deposits by the banks in Turkey. Additionally, we test the interaction between the deposit insurance and market discipline and the effect of recent financial crises on depositor behaviour. Our results provide evidence on the presence of market discipline before the financial crisis in Turkey in 2001 such that the depositors withdrew their funds from risky banks, which are ready to pay above market interest rates. However the announcement of blanket guarantee for uninsured bank debts after the initialisation of banking industry-restructuring program in 2001 hindered monitoring motives of depositors and uninsured debtholders of the banks.
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