Latin American Banks, Market Discipline and Official Regulation: Completing the Circle

31 Pages Posted: 3 May 2005

See all articles by Arturo José Galindo

Arturo José Galindo

Inter-American Development Bank

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Ana Maria Loboguerrero

University of California, Los Angeles (UCLA)

Date Written: April 2005

Abstract

The banking literature on market discipline has stressed that depositors punish banks that take greater risks by demanding higher interest rates or withdrawing funds. We extend these results to a true cross-country analysis for 13 countries in Latin America. However, on splitting the sample, we also find that market discipline is only strong in countries with higher Basel Core Principles of Banking Supervision (BCP) compliance. In contrast to previous analyses, we also estimate a system comprising of equations for the interest rate, changes in deposits and bank risk that allows us to investigate not only whether depositors punish higher risk banks but also how banks respond. We find that private banks do respond to market discipline but the result is driven by high BCP-compliant countries. We suggest that official regulation and market discipline are complements and that while rules on disclosure, transparency and other tools to enhance market discipline should be stressed traditional supervision should also be enhanced.

Keywords: Market Discipline, Prudential Regulation, Banking

JEL Classification: G20, G21, G38

Suggested Citation

Galindo, Arturo José and Powell, Andrew P. and Powell, Andrew P. and Loboguerrero, Ana Maria, Latin American Banks, Market Discipline and Official Regulation: Completing the Circle (April 2005). Available at SSRN: https://ssrn.com/abstract=712883 or http://dx.doi.org/10.2139/ssrn.712883

Arturo José Galindo (Contact Author)

Inter-American Development Bank ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Andrew P. Powell

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina
+5411 4787-9349 (Phone)
+5411 4783-3220 (Fax)

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Ana Maria Loboguerrero

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

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