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Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic

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Author Info
Hanousek, Jan
Roland, Gérard

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Abstract

We 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3122.

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Date of creation: Jan 2002
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Handle: RePEc:cpr:ceprdp:3122

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Related research
Keywords: bank failures bank supervision czech banking crisis default risk transitional economies

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
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; Mortgages
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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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.:
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(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. Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," Middlebury College Working Paper Series 0607, Middlebury College, Department of Economics. [Downloadable!]
    Other versions:
  2. Anca Podpiera & Jiri Podpiera, 2005. "Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure," Working Papers 2005/06, Czech National Bank, Research Department. [Downloadable!]
  3. Karas, Alexei & Pyle, William & Schoors, Koen, 2006. "Sophisticated discipline in a nascent deposit market: Evidence from post-communist Russia," BOFIT Discussion Papers 13/2006, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
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