Market Discipline Under Systemic Risk: Evidence from Bank Runs in Emerging Economies

49 Pages Posted: 20 Apr 2016

See all articles by Eduardo Levy Levy-Yeyati

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Maria Soledad Martinez Peria

International Monetary Fund (IMF)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Date Written: October 27, 2004

Abstract

Levy-Yeyati, Martinez Peria, and Schmukler show that systemic risk exerts a significant impact on the behavior of depositors, sometimes overshadowing their responses to standard bank fundamentals. Systemic risk can affect market discipline both regardless of and through bank fundamentals. First, worsening systemic conditions can directly threaten the value of deposits by way of dual agency problems. Second, to the extent that banks are exposed to systemic risk, systemic shocks lead to a future deterioration of fundamentals not captured by their current values. Using data from the recent banking crises in Argentina and Uruguay, the authors show that market discipline is indeed quite robust once systemic risk is factored in. As systemic risk increases, the informational content of past fundamentals declines. These episodes also show how few systemic shocks can trigger a run irrespective of ex-ante fundamentals. Overall, the evidence suggests that in emerging economies, the notion of market discipline needs to account for systemic risk.

This paper - a product of the Finance Team, Development Research Group - is part of a larger effort in the group to study market discipline.

Keywords: market discipline, idiosyncratic risk, systemic risk, emerging markets, depositor behavior, bank run, banking crises

JEL Classification: F30, F41, G14, G21, G28

Suggested Citation

Levy-Yeyati, Eduardo Levy and Martinez Peria, Maria Soledad and Schmukler, Sergio, Market Discipline Under Systemic Risk: Evidence from Bank Runs in Emerging Economies (October 27, 2004). World Bank Policy Research Working Paper No. 3440. Available at SSRN: https://ssrn.com/abstract=625318

Eduardo Levy Levy-Yeyati (Contact Author)

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Maria Soledad Martinez Peria

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sergio Schmukler

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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