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Financial Market Discipline in Early 20th Century Mexico

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Author Info

  • Elisabeth Huybens

    ()
    (The World Bank)

  • Astrid Luce

    (Department of Economics, University of Essex)

  • Sangeeta Pratap

    ()
    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

Abstract

We test for the presence of market discipline in the banking sector in early 20th century Mexico. Using a panel of financial data from note-issuing banks between 1905 and 1910, we examine whether bank fundamentals influenced the pattern of withdrawals. If we do not control for exit, our estimation suggests that fundamentals were not a significant determinant of depositor behavior. Instead, bank specific fixed effects and systemic risk seem to have been the most important determinants of net changes in deposits. However this period included the banking crisis of 1907 and the subsequent exit of several banks. Our results change when we use a two step estimator to take this into account. Controlling for the selection bias created by exiting banks, we show that fundamentals were indeed an important determinant of bank withdrawals in this period, indicating the existence of market discipline.

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File URL: http://ftp.itam.mx/pub/academico/inves/pratap/01-04.pdf
File Function: First version, 2001
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Bibliographic Info

Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0104.

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Length: 21 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:cie:wpaper:0104

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Keywords: market discipline; selection bias;

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  1. Martinez Peria, Maria Soledad & Schmukler, Sergio L., 1999. "Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico," Policy Research Working Paper Series 2058, The World Bank.
  2. Timothy H. Hannan & Gerald A. Hanweck, 1986. "Bank insolvency risk and the market for large certificates of deposit," Working Papers in Banking, Finance and Microeconomics 86-1, Board of Governors of the Federal Reserve System (U.S.).
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