Depositor discipline in Indian banking: Separating facts from folklore

Ghosh, Saibal and Das, Abhiman (2006): Depositor discipline in Indian banking: Separating facts from folklore. Published in: Monetary Policy and Issues: New Research : pp. 139-163.

Abstract

The paper traces the determinants of depositor discipline in Indian banking. Using data for the period 1997:1 to 2002:4, the findings reveal that, while bank-specific factors are dominant in case of state-owned banks, systemic variables tend to overwhelm bank-specific factors in explaining behaviour of depositors of private banks. In case of private and foreign banks, policy announcements have an important bearing on the dependent variable. For state-owned banks, larger asset translates into higher deposit growth, suggesting that depositors are sensitive to the ‘too-big-to-fail’ effect. Finally, insured depositors tend to exercise discipline by compelling banks to pay a higher price on deposits.

• Item Type: MPRA Paper
• Language: English
• Keywords: depositor discipline; contagion effect; deposit insurance; banking; India
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Ahluwalia, M.S. (2002), ‘Economic Reforms in India Since 1991: Has Gradualism Worked?’, Journal of Economic Perspectives, 16: 67-88.

Arellano, M. and Bond, S. (1991), ‘Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations’, Review of Economic Studies, 58: pp. 277-297.

Baer, H and Brewer, E. (1986), ‘Uninsured Deposit as a Source of Market Discipline’, Economic Perspectives: Federal Reserve Bank of Chicago.

Barajas, A and Steiner, R. (2000), ‘Depositor Behaviour and Market Discipline in Colombia’, IMF Working Paper No.214, IMF: Washington D.C.

Basel Committee on Banking Supervision (1999), A New Capital Adequacy Framework, BIS: Basel.

Berger, A.N (1991), ‘Market Discipline in Banking’, Proceedings of a Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago.

Berger, A.N., S.M.Davies and M.Flannery (2000), ‘Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?’, Journal of Money, Credit and Banking, 32: 641-667.

Bhide, M.G., Prasad, A. and Ghosh, S. (2001), ’Emerging Challenges in Indian Banking’. CREDPR Working Paper No.103, Stanford University.

Birchler, U.W and Maechler, A.M. (2001), ‘Do Depositors’ Discipline Swiss Banks?’, Discussion Paper No.6, Swiss National Bank.

Calomiris, C and A.Powell (2001), ‘Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992-99’, in F.S.Mishkin (ed.) Prudential Supervision: What Works and What Doesn’t’? USA: University of Chicago Press.

Caprio, G and P.Honohan (1998), ‘Restoring Banking Stability: Beyond Supervised Capital Requirements’, Journal of Economic Perspectives, 4: 43-64.

Chakravarty, S. (1987). Development Planning: The Indian Experience, New Delhi: Oxford University Press.

Covitz, D.M., D.Hancock and M.Kwast (2000), ‘Mandatory Sub-ordinated Debt: Would Banks Face More Market Discipline?’, Finance and Economics Discussion Series, Federal Reserve Board.

Demetriades, P.O. and Luintel, K.B. (1996), ‘Financial Development, Economic Growth and Banking Sector Controls: Evidence from India’, The Economic Journal, 106: 359-374.

Deposit Insurance and Credit Guarantee Corporation, Annual Report (various years).

Ellis, D. and Flannery, M. (1992). Does the Debt Market Assess Large Banks’ Risk? Time Series Evidence from Money Center CDS’, Journal of Monetary Economics, 30: 481-502.

Flannery, M. (1998). ‘Using Market Information in Prudential Bank Supervision: A Review of U.S. Empirical Evidence’, Journal of Money, Credit and Banking, 3: 273-305.

Flannery, M. (2001). ‘Two Faces of Market Discipline’, Journal of Financial Services Research, 20: 107-119.

Flannery, M and Sorescu, S.M. (1996). ‘Evidence of Bank Market Discipline in Sub-ordinated Debt Yields’, Journal of Finance, 4: 1347-1375.

Ghosh, S., Nachane, D.M., Narain, A. and Sahoo, S. (2003), ‘Capital Requirements and Bank Behaviour: An Empirical Analysis of Indian Public Sector Banks’, Journal of International Development, 15: 145-156.

Government of India (1991). Report of the Committee on the Financial System, Government of India: New Delhi.

Government of India (1998). Report of the Committee on Banking Sector Reforms, Government of India: New Delhi.

Greenspan, A. (2001). ‘Harnessing Market Discipline’, The Region: Federal Reserve Bank of Minneapolis.

Jagtiani, J. and Lemieux, C. (2001). ‘Market Discipline Prior to Bank Failure’, Journal of Economics and Business, 53: 313-324.

Jalan, B. (2002). ‘Indian Banking and Finance: Managing New Challenges’, (www.bis.org/review/r020115b).

Martinez Peria, M.S. and Schmukler, S. (2001). ‘Do Depositors Punish Banks for Bad Behaviour: Market Discipline, Deposit Insurance and Banking Crises’, Journal of Finance, 56: 1029-1051.

Mishkin, F.S (2001). ‘Prudential Supervision: Why is it Important and What are the Issues?’, in F.S.Mishkin (ed.) Prudential Supervision: What Works and What Doesn’t?’, USA: University of Chicago Press.

Nakaso, H., Hattori, M., Nagae, T. and Hamada, H. (2000). ‘Changes in Bank Behaviour during the Financial Crises: Experiences of the Financial Crises in Japan’, Paper presented at the IMF Central Banking Conference, Washington D.C.

Park, S (1995). Market Discipline by Depositors: Evidence from Reduced Form Equations. Quarterly Review of Economics and Business. 35: 497-514.

Park, S and Peristiani, S. (1998). ‘Market Discipline by Thrift Depositors’, Journal of Money, Credit and Banking, 30: 347-364.

Reserve Bank of India (1954), All-India Debt and Investment Survey, RBI: Mumbai.

Reserve Bank of India (2003). Handbook of Statistics on Indian Economy, RBI: Mumbai.

Reserve Bank of India (a). Report on Trend and Progress of Banking in India (various years), RBI: Mumbai.

Reserve Bank of India (b). Statistical Tables Relating to Banks in India (various years), RBI: Mumbai.

World Bank (2001). Global Economic Prospects and the Developing Countries, The World Bank: Washington D.C.