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Market Discipline in Depositors’ Behavior and the Role of Risk-Rating Agencies: The Case of Chile

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  • Carlos Budnevich L.
  • Helmut Franken M.
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    Abstract

    This study re-examines the evidence of market discipline in depositors’ behavior in the Chilean banking system, and analyzes the role of risk-rating agencies in complementing the information available to the market for evaluating bank solvency in Chile. With that in mind, we use data on deposits by size and institutional sector, effective interest rates on time deposits, a set of indicators that reflect the solvency of banks, and the risk rates of bank-issued fixed-income securities. Our results for Chile show that the empirical evidence about market discipline tends to be stronger and more robust when measured by the interest rate, as opposed to the rate of growth of time deposits. Our empirical assessment regarding the role of risk-rating agencies in disseminating relevant information that promotes market discipline is inconclusive. On the one hand, we find some evidence in favor of the hypothesis that the analytical contribution of these entities cannot be replaced by more direct indicators of bank solvency, which can be constructed with publically available information. On the other, we find other evidence that tend to weaken the previous hypothesis.

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    Bibliographic Info

    Article provided by Central Bank of Chile in its journal Economía Chilena.

    Volume (Year): 6 (2003)
    Issue (Month): 2 (August)
    Pages: 45-70

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    Handle: RePEc:chb:bcchec:v:6:y:2003:i:2:p:45-70

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    1. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, pages 641-670.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    3. Gorton, Gary & Santomero, Anthony M, 1990. "Market Discipline and Bank Subordinated Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 119-28, February.
    4. Avery, Robert B & Belton, Terrence M & Goldberg, Michael A, 1988. "Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 597-610, November.
    5. Roberto Steiner & Adolfo Barajas, 2000. "Depositor Behavior and Market Discipline in Colombia," IMF Working Papers 00/214, International Monetary Fund.
    6. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    7. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
    8. Bryant, John, 1981. "Bank Collapse and Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 454-64, November.
    9. Cook, Douglas O & Spellman, Lewis J, 1994. "Repudiation Risk and Restitution Costs: Toward Understanding Premiums on Insured Deposits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 439-59, August.
    10. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
    11. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
    12. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
    13. Park, Sangkyun & Peristiani, Stavros, 1998. "Market Discipline by Thrift Depositors," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 347-64, August.
    14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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