Market Discipline during Crisis: Evidence from Bank Depositors in Transition Countries

Hasan, Iftekhar and Jackowicz, Krzysztof and Kowalewski, Oskar and Kozłowski, Łukasz (2012): Market Discipline during Crisis: Evidence from Bank Depositors in Transition Countries.

Abstract

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in worse financial conditions than their subsidiaries. This situation created a unique opportunity to study new aspects of depositor discipline. In this article, we investigate whether depositors flexibly accommodated to the changing sources of risk. We also analyse the informational foundations of depositors’ decisions. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were much more strongly influenced by press rumours concerning parent companies than by fundamentals, and that the impact of rumours on deposit growth rates was highly economically significant. Additionally, we document that public aid announcements were interpreted by depositors primarily as a confirmation of a parent company’s financial distress. Our results have important policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.

• Item Type: MPRA Paper
• Language: English
• Keywords: depositor behaviour, market discipline, crisis, emerging markets
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Arellano M.., Bond S. R. (1991), Some tests of specifications for panel data: Monte Carlo evidence and an application to employment equations, “Review of Economic Studies”, Vol. 58, p. 277-297.

Bank for International Settlements (2009), An Assessment of financial sector rescue programmes, BIS Papers, No. 48.

Barajas A., Steiner R. (2000), Depositor behavior and market discipline in Colombia, IMF Working Paper, No. WP/00/214.

Billett M.T., Garfinkel J.A., O’Neal E.S. (1998): The cost of market versus regulatory discipline in banking, “Journal of Financial Economics”, Vol. 48, No. 3, p. 333-358.

Bliss R.R., Flannery M.J. (2001), Market discipline in the governance of U.S. bank holding companies: Monitorig vs. influencing, p. 107-143 in: F. S. Mishkin, (ed), Prudential supervision. What works and what doesn’t, The University of Chicago Press, Chicago, London.

Blundell R.W., Bond S.R. (1998), Initial conditions and moment restrictions in dynamic panel data models, “Journal of Econometrics”, Vol. 87, p. 115-143.

Bonin, J.P., Hasan, I., Wachtel P. (2005), Bank performance, efficiency and ownership in transition countries, “Journal of Banking and Finance”, Vol. 29, p. 31–53.

Brewer III E., Mondschean T.H. (1994), An empirical test of the incentive effects of deposit insurance. The case of junk bonds at savings and loan associations, “Journal of Money, Credit, and Banking”, Vol. 26, p. 146-164.

Calomiris C.W., Powell A. (2001), Can emerging market bank regulators establish credible discipline? The case of Argentina, 1992-1999, s. 147-191, in: F. S. Mishkin (ed.), Prudential supervision. What works and what doesn’t, National Bureau of Economic Research, The University of Chicago Press, Chicago and London.

Cargill T.F. (1989), CAMEL ratings and the CD market, “Journal of Financial Services Research”, Vol. 3, p. 347-358.

Doornik J.A., Hendry D. F. (2009), Econometric modelling. PcGive 13, Timberlake Consultants Ltd.

Ellis D.M., Flannery M.J. (1992), Does the debt market assess large banks’ risk? Time series evidence from money center CDs, “Journal of Monetary Economics”, Vol. 30, p. 481-502.

Ferguson M. F., Stevenson B.A. (2007), What’s different about banks ? Depositor discipline and active monitoring. Available at SSRN: http://ssrn.com/abstract=891446. Financial Stability Board – FSB (2009), Exit form extraordinary financial sector support measures. Note for G20 Ministers and Governors meeting 6-7 November 2009. Financial Stability Board – FSB (2010), Update on unwinding temporary deposit insurance arrangements. Note by the Staffs of the International Association of Deposit Insurers and the International Monetary Fund.

Forssbaeck J. (2011), Ownership structure, market discipline, and banks’ risk-taking incentives under deposit insurance, Journal of Banking and Finance, Vol. 35, p. 266-2678.

Fritsch, M., Gleisner, F., Holzhäuser, M. (2007), Bank M&A in Central and Eastern Europe, Working Paper. Available at SSRN: http://ssrn.com/abstract=966294.

Goldberg L.G., Hudgins S.C. (2002), Depositor discipline and changing strategies for regulating thrift institutions, “Journal of Financial Economics”, Vol. 63, Is. 1, p. 263-274.

Gropp R., Vesala J. (2001), Deposit Insurance and moral hazard: Does the counterfactual matter ?, European Central Bank, Working Paper Series, No. 47.

Haas de R., van Lelyveld, I. (2006), Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis, “Journal of Banking and Finance”, Vol. 30, p. 1927-1952.

Hadad M.D., Agusman A., Monroe G. S, Gasbarro D. (2011), Market discipline, financial crisis and regulatory changes: Evidence from Indonesian banks, “Journal of Banking and Finance”, Vol. 35, p. 1552-1562.

Hannan T.H., Hanweck G.A. (1988), Bank insolvency risk and the market for large certificates of deposit, “Journal of Money, Credit and Banking”, Vol. 20, p. 203-211.

Haselmann, R. (2006), Strategies of foreign banks in transition economies, “Emerging Markets Review”, Vol. 7, p. 283-299.

Hess K., Feng G. (2007), Is there market discipline for New Zealand non-bank financial institutions, “Journal of International Financial Markets, Institutions & Money”, Vol. 17, p. 326-340.

Hosono K. (2005), Market discipline to banks in Indonesia, the Republic of Korea, Malaysia and Thailand, Asian Development Bank Institute Conference, Corporate Governance of Banks in Asia, January 20-21.

Ioannidou V.P., Penas M. F. (2010), Deposit insurance and bank risk-taking: Evidence from internal loan rating, “Journal of Financial Intermediation”, Vol. 19, p. 95-115.

Jackowicz K. (2004), Dyscyplina rynkowa w bankowości. Rodzaje i możliwości zastosowania [Market discipline in banking. Types and applications], Wydawnictwo Wyższej Szkoły Przedsiębiorczości i Zarządzania im. L. Koźmińskiego, Warszawa.

Jackowicz K, Kowalewski O., Kozłowski Ł. (2011), The impact of electoral factors on commercial banks in CEE countries, Wharton Financial Institutions Center Working Paper No. 11-02. Available at SSRN: http://ssrn.com/abstract=1736289 or http://dx.doi.org/10.2139/ssrn.1736289

Jagtiani J., Lemieux C. (2000), Stumbling blocks to increasing market discipline in the banking sector: a note on bond pricing and funding strategy prior to failure, “Emerging Issues Series”, Supervision and Regulation Department, Federal Reserve Bank of Chicago, S&R-99-8R.

Jordan J.S. (2000), Depositor discipline at failing banks, “New England Economic Review”, Federal Reserve Bank of Boston, p. 15-28.

Kouassi T., Distinguin I., Tarazi A. (2011), Bank deposit insurance, moral hazard and market discipline: Evidence from Central and Eastern Europe. Available at SSRN: http://ssrn.com/abstract=1830265 or http://dx.doi.org/10.2139/ssrn.1830265.

Kraft E., Galac T. (2007), Deposit interest rates, asset risk and bank failure in Croatia, “Journal of Financial Stability, Vol. 2, p. 312-336.

Kutner G.W. (1992), CD Market response to continental Illinois’ liquidity crisis and its subsequent bailout, “The Mid-Atlantic Journal of Business”, p. 133-146.

Levy-Yeyati E., Peria M.S.M., Schmukler S. L.. (2004), Market discipline under systemic risk: Evidence from bank runs in emerging economies, The World Bank Group, Working Paper No. 3440, October.

Maechler A.M., McDill, K.M. (2006), Dynamic depositor discipline in US banks, “Journal of Banking & Finance”, Vol. 30, p. 1871-1898.

Mondschean T.S., Opiela T.P. (1999), Bank time deposit rates and market discipline in Poland: The impact of state ownership and deposit insurance reform, “Journal of Financial Services Research”, Vol. 15, p. 179-196.

Office of the Special Inspector General for the Troubled Asset Relief Program (2009), Emergency capital injections provided to support the viability of Bank of America, other major banks, and the U.S. Financial System, SIGTARP-10-001. Oliveira R.F., Schiozer R.F., Barros L.A.B. (2011),

Financial crisis and cross-border too big to fail perception, Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1787661 or http://dx.doi.org/10.2139/ssrn.1787661.

Önder Z., Özyildirim S. (2008), Market Reaction to risky banks: Did generous deposit guarantee change it ?, “World Developments”, Vol. 36, p. 1415-1435.

Opiela T. (2004), Was there an implicit full guarantee at financial institutions in Thailand ? Evidence of risk pricing by depositors, “Journal of Comparative Economics”, Vol. 32, p. 519-541.

Park S., Peristiani S. (1998), Market discipline by thrift depositors, “Journal of Money, Credit, and Banking”, Vol. 30, Is. 3, p. 347-364.

Park S., Peristiani S. (2001) , Are bank shareholders enemies of regulators or a potential source of market discipline ?, Federal Reserve Bank of New York, Staff Reports, No. 138.

Peria M.S.M., Schmukler S.L. (2001), Do depositors punish banks for bad behavior? Market discipline, Deposit insurance, and banking crisis, “The Journal of Finance”, Vol. 56, p. 1029-1051.

Prean N., Stix H. (2011), The effect of raising deposit insurance coverage in times of financial crisis – Evidence from Croatia microdata, “Economic Systems”, doi: 10.1016/j.ecosys.2011.01.004.

Shimizu K. (2009), Is the information produced in the stock market useful for depositors?, ”Finance Research Letters”, Vol. 6, p. 34-39.

Shleifer, A. (1998), State versus private ownership, “Journal of Economic Perspectives”, Vol. 12, p. 133-150. Uchida H, Satake M. (2009), Market discipline and bank efficiency, “Journal of International Financial Markets, Institutions & Money”, Vol. 19, p. 792-802.