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When does financial liberalization make banks risky? : an empirical examination of Argentina, Canada and Mexico

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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) lack of market discipline encourages risky lending and (2) financial liberalization or privatization lead to risky lending. However, there is evidence to suggest that neither financial liberalization nor weak market discipline always precedes risky lending. We test for depositor discipline and, separately for post-liberalization or post-privatization risky lending in Argentina, Canada, and Mexico. In the countries without market discipline, lending risk increases significantly in the wake of liberalization. Where depositors discipline banks, banks neither behave riskily nor does their risk increase in the wake of privatization. ; Economic Research Working Paper 9905

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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 0399.

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    Date of creation: 1999
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    Handle: RePEc:fip:feddcl:0399

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    Keywords: Banks and banking - Argentina ; Banks and banking - Canada ; Banks and banking - Mexico ; Financial crises;

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    1. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
    2. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
    3. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
    4. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
    5. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    6. Shaffer, Sherrill, 1993. "A Test of Competition in Canadian Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 49-61, February.
    7. Jayanti, S. V. & Whyte, Ann Marie & Quang Do, A., 1996. "Bank failures and contagion effects: Evidence from Britain and Canada," Journal of Economics and Business, Elsevier, vol. 48(2), pages 103-116, May.
    8. Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-66, September.
    9. Gerald Caprio & Michael Dooley & Danny Leipziger & Carl Walsh, 1996. "The lender of last resort function under a currency board: The case of Argentina," Open Economies Review, Springer, vol. 7(1), pages 625-650, March.
    10. Carlos E. Zarazaga, 1995. "Argentina, Mexico, and currency boards: another case of rules versus discretion," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 14-24.
    11. Amoako-Adu, Ben & Smith, Brian F., 1995. "The wealth effects of deregulation of Canadian financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1211-1236, October.
    12. Sherrill Shaffer, 1994. "Evidence of monopoly power among credit card banks," Working Papers 94-16, Federal Reserve Bank of Philadelphia.
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    Cited by:
    1. Linda Goldberg & B. Gerard Dages & Daniel Kinney, 2000. "Foreign and Domestic Bank Participation in Emerging Markets: Lessons from Mexico and Argentina," NBER Working Papers 7714, National Bureau of Economic Research, Inc.
    2. Jennifer S. Crystal & B. Gerard Dages & Linda S. Goldberg, 2001. "Does foreign ownership contribute to sounder banks in emerging markets? the Latin American experience," Staff Reports 137, Federal Reserve Bank of New York.

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