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Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?

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  • Önder, Zeynep
  • Özyildirim, Süheyla
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    Abstract

    Summary Turkey experienced a massive banking crisis in February 2001, resulting in the loss of more than a thousand managerial jobs and the closure of 21% of all bank branches in the market. In this paper, we study the behavior of the market and the banks in Turkey before the crisis, from 1988 to 2000, which includes the period of full deposit insurance. The empirical results showed that not only depositors but also borrowers reacted negatively to risky banks and punished them even more during the period of generous government guarantee. However, in the same period, banks were found to increase their moral hazard behavior significantly. Although the International Monetary Fund and the World Bank recommend explicit deposit insurance for developing countries, the findings of this paper suggest that deposit insurance may not be an effective policy tool to improve market confidence, and it does not guarantee a stable economic environment even when the market reacts negatively to the moral hazard behavior of banks.

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    Bibliographic Info

    Article provided by Elsevier in its journal World Development.

    Volume (Year): 36 (2008)
    Issue (Month): 8 (August)
    Pages: 1415-1435

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    Handle: RePEc:eee:wdevel:v:36:y:2008:i:8:p:1415-1435

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    Web page: http://www.elsevier.com/locate/worlddev

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    Cited by:
    1. Disli, Mustafa & Schoors , Koen & Meir, Jos, 2013. "Political connections and depositor discipline," BOFIT Discussion Papers 6/2013, Bank of Finland, Institute for Economies in Transition.
    2. Hasan, Iftekhar & Jackowicz, Krzysztof & Kowalewski , Oskar & Kozlowski , Lukasz, 2013. "Market discipline during crisis: Evidence from bank depositors in transition countries," BOFIT Discussion Papers 21/2013, Bank of Finland, Institute for Economies in Transition.
    3. M. Disli & K. Schoors, 2013. "Bank rebranding and depositor loyalty," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 13/867, Ghent University, Faculty of Economics and Business Administration.

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