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Market discipline during crisis: Evidence from bank depositors in transition countries

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Author Info

  • Hasan, Iftekhar

    ()
    (BOFIT)

  • Jackowicz, Krzysztof

    ()
    (BOFIT)

  • Kowalewski , Oskar

    ()
    (BOFIT)

  • Kozlowski , Lukasz

    ()
    (BOFIT)

Abstract

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results, indicating that depositors react rationally to sources of information other than financial statements, have policy implications, as depositor disci-pline is usually the only viable and universal source of market discipline for banks in emerging economies.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 21/2013.

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Length: 44 pages
Date of creation: 12 Aug 2013
Date of revision:
Handle: RePEc:hhs:bofitp:2013_021

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Keywords: depositor behavior; market discipline; crisis; emerging markets; market rumors;

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Cited by:
  1. Brown, Martin & Guin, Benjamin & Morkoetter, Stefan, 2013. "Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks," Working Papers on Finance 1319, University of St. Gallen, School of Finance.

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