Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic
AbstractWe present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.
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Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp192.
Date of creation: Nov 2001
Date of revision:
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bank failures; bank supervision; Czech banking crisis; default risk; transitional economies;
Other versions of this item:
- Jan Hanousek & Gerard Roland, 2001. "Banking Passivity And Regulatory Failure In Emerging Markets: Theory And Evidence From The Czech Republic," William Davidson Institute Working Papers Series 424, William Davidson Institute at the University of Michigan.
- Hanousek, Jan & Roland, Gérard, 2002. "Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic," CEPR Discussion Papers 3122, C.E.P.R. Discussion Papers.
- Jan Hanousek & Gerard Roland, 2002. "Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech republic," Econometrics 0203004, EconWPA.
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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