This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

The impact of explicit deposit insurance on market discipline

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Vasso P. Ioannidou
Jan de Dreu

Additional information is available for the following registered author(s):

Abstract

This paper examines the interaction between market discipline and explicit or implicit deposit insurance using the experiences of Bolivia during the period 1998:1 to 2003:12. The country-specific circumstances during this period allow us to investigate the effect of explicit deposit insurance on market discipline in a setup that resembles a controlled experiment. Contrary to other studies on developing countries, we find a strong link between bank fundamentals and the supply of deposits, which is consistent with the hypothesis that market discipline is at work. The results also suggest that most of the market discipline comes from large depositors. More importantly, we find that the introduction of an explicit deposit insurance system (as opposed to implicit guarantees) caused a significant reduction in market discipline, especially from large depositors. These findings are in line with the characteristics of the deposit insurance system and with the bailout practices of the Bolivian Central Bank before the introduction of deposit insurance. Finally, the results also suggest that foreign banks are subject to less market discipline than domestic banks and that depositors “run” more from domestic banks than from foreign banks during episodes of political instability.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.chicagofed.org/news_and_conferences/conferences_and_events/files/2005_bsc_ioannidou.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Article provided by Federal Reserve Bank of Chicago in its journal Proceedings.

Volume (Year): (2005)
Issue (Month): May ()
Pages: 124-139
Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Handle: RePEc:fip:fedhpr:y:2005:i:may:p:124-139

Contact details of provider:
Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834
Phone: 312/322-5111
Fax: 312/322-5515
Email:
Web page: http://www.chicagofed.org/
More information through EDIRC

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Deposit insurance

Other versions of this item:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Schumacher, Liliana, 2000. "Bank runs and currency run in a system without a safety net: Argentina and the 'tequila' shock," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 257-277, August. [Downloadable!] (restricted)
  2. Edward J. Kane, 1987. "Who Should Learn What From the Failure and Delayed Bailout of the ODGF?," NBER Working Papers 2260, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank. [Downloadable!]
  4. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June. [Downloadable!] (restricted)
    Other versions:
  5. Furfine, Craig H, 2001. "Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market," Journal of Business, University of Chicago Press, vol. 74(1), pages 33-57, January. [Downloadable!] (restricted)
  6. Reint Gropp & Jukka Vesala, 2002. "Deposit insurance, moral hazard, and market monitoring," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 75-107.
    Other versions:
  7. Laeven, Luc, 2004. "The political economy of deposit insurance," Policy Research Working Paper Series 3247, The World Bank. [Downloadable!]
    Other versions:
  8. 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.
  9. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October. [Downloadable!] (restricted)
  10. Billett, Matthew T. & Garfinkel, Jon A. & O'Neal, Edward S., 1998. "The cost of market versus regulatory discipline in banking1," Journal of Financial Economics, Elsevier, vol. 48(3), pages 333-358, June. [Downloadable!] (restricted)
  11. James, Christopher, 1988. "The use of loan sales and standby letters of credit by commercial banks," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 395-422. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. James, Christopher, 1990. "Heterogeneous creditors and the market value of bank LDC loan portfolios," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 325-346, June. [Downloadable!] (restricted)
  14. Enrica Detragiache & Asli Demirgüç-Kunt, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers 00/3, International Monetary Fund.
  15. Edward J. Kane, 1987. "Who should learn what from the failure and delayed bailout of the ODGF?," Proceedings, Federal Reserve Bank of Chicago, pages 306-326.
  16. Joe Peek & Eric S. Rosengren, 2000. "Implications of the globalization of the banking sector: the Latin American experience," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 45-62. [Downloadable!]
    Other versions:
  17. Charles W. Calomiris & Andrew Powell, 2000. "Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992-1999," NBER Working Papers 7715, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Cook, Douglas O. & Spellman, Lewis J., 1991. "Federal financial guarantees and the occasional market pricing of default risk: Evidence from insured deposits," Journal of Banking & Finance, Elsevier, vol. 15(6), pages 1113-1130, December. [Downloadable!] (restricted)
  19. Ellis, David M. & Flannery, Mark J., 1992. "Does the debt market assess large banks, risk? : Time series evidence from money center CDs," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 481-502, December. [Downloadable!] (restricted)
  20. Park, Sangkyun, 1995. "Market discipline by depositors: Evidence from reduced-form equations," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(35), pages 497-514. [Downloadable!] (restricted)
  21. Flannery, Mark J, 1982. "Retail Bank Deposits as Quasi-Fixed Factors of Production," American Economic Review, American Economic Association, vol. 72(3), pages 527-36, June. [Downloadable!] (restricted)
  22. Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank. [Downloadable!]
    Other versions:
  23. 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. [Downloadable!] (restricted)
  24. Herbert Baer & Elijah Brewer, 1986. "Uninsured deposits as a source of market discipline: some new evidence," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 23-31.
  25. 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. [Downloadable!]
    Other versions:
  26. 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. [Downloadable!] (restricted)
  27. Goldberg, Lawrence G. & Hudgins, Sylvia C., 1996. "Response of uninsured depositors to impending S&L failures: Evidence of depositor discipline," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(3), pages 311-325. [Downloadable!] (restricted)
  28. Adolfo Barajas & Roberto Steiner, . "Depositor Behavior and Market Discipline in Colombia," IMF Working Papers 00/214, International Monetary Fund.
  29. Asli Demirguc-Kunt & Edward J. Kane, 2002. "Deposit Insurance around the Globe: Where Does It Work?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 175-195, Spring. [Downloadable!] (restricted)
    Other versions:
  30. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-11, May. [Downloadable!] (restricted)
    Other versions:
  31. Maria Soledad Martinez Peria, 2001. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Journal of Finance, American Finance Association, vol. 56(3), pages 1029-1051, 06. [Downloadable!] (restricted)
  32. Eduardo Levy Yeyati & Maria Soledad Martinez Peria & Sergio Schmukler, 2004. "Market Discipline in Emerging Economies: Beyond Bank Fundamentals," Business School Working Papers marketdiscipline, Universidad Torcuato Di Tella. [Downloadable!]
  33. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Peresetsky, A.A. & Karminsky, A.M. & Golovan, S.V., 2007. "Russian banks´ private deposit interest rates and market discipline," BOFIT Discussion Papers 2/2007, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  2. Semenova Maria, 2007. "How depositors discipline banks: the case of Russia," EERC Working Paper Series 07-02e, EERC Research Network, Russia and CIS. [Downloadable!]
Statistics
Access and download statistics

Did you know? There is a FAQ (frequently asked questions).

This page was last updated on 2008-8-11.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.