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Banking Crises, Deposit Insurance, and Market Discipline: Lessons from the Asian Crises

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Author Info
Kaoru Hosono
Hiroko Iwaki
Kotaro Tsuru

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Abstract

We investigate the effectiveness of market discipline by depositors during the period of 1992-2002 in the four crisis-hit Asian countries: Indonesia, Korea, Malaysia and Thailand. In Indonesia, the crises first weakened and then strengthened market, which is consistent with the wake-up-call effect found for the Latin American crisis-hit countries (Martinez Peria and Schmukler, 2001). Unlike Indonesia, we could not find an increase in depositors' responsiveness to bank risk after the crisis in the other three countries. In Korea and Thailand, depositors' risk sensitivity rather decreased after the crisis. In these countries, market discipline was at play before the crisis and the deposit protection schemes were constructed to ensure its credibility under stable political conditions.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 05029.

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Length: 27 pages
Date of creation: Dec 2005
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Handle: RePEc:eti:dpaper:05029

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References listed on IDEAS
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  1. Kaoru Hosono & Hiroko Iwaki & Kotaro Tsuru, 2004. "Bank Regulation and Market Discipline around the World," Discussion papers 04031, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  2. Polsiri, Piruna & Wiwattanakantang, Yupana, 2006. "Corporate Governance of Banks in Thailand," CEI Working Paper Series 2005-20, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  3. 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)
  4. 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)
  5. 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)
  6. 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)
  7. 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.
  8. 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. [Downloadable!]
  9. 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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  10. 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)
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