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Financial liberalization, market discipline and bank risk

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  • William C. Gruben
  • Jahyeong Koo
  • Robert R. Moore
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    Abstract

    In the literature on systemic banking crises, two common themes are: (1) Risky lending often follows bank liberalization. (2) Lack of market discipline encourages risky lending. That not all liberalizations are followed by financial crisis and that financial systems without market discipline sometimes operate without incident invites examination of these themes. In a test of six countries, we find that our measure of bank risk increases significantly in the wake of financial liberalizations, but only where depositors fail to discipline banks. Our measures of market discipline and bank risk, however, are persistently inversely related

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    File URL: http://dallasfed.org/assets/documents/research/claepapers/2003/lawp0303.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0303.

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    Date of creation: 2003
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    Handle: RePEc:fip:feddcl:0303

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    1. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
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    10. William C. Gruben, 1996. "Policy priorities and the Mexican exchange rate crisis," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 19-29.
    11. Takatoshi Ito & Anne O. Krueger, 1996. "Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5," NBER Books, National Bureau of Economic Research, Inc, number ito_96-1.
    12. 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.
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    Cited by:
    1. Daniel, Betty C. & Jones, John Bailey, 2007. "Financial liberalization and banking crises in emerging economies," Journal of International Economics, Elsevier, vol. 72(1), pages 202-221, May.

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