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International Financial competition and bank risk-taking in emerging economies

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  • Arnaud Bourgain
  • Patrice Pieretti
  • Skerdilajda Zanaj

    ()
    (CREA, University of Luxembourg)

Abstract

In this paper, we analyze the risk taking behavior of banks in emerging economies, in a context of international bank competition. In the spirit of Vives (2002 and 2006) who has developed the notion of "external market discipline", our paper introduces a new channel through which depositors can exercise pressure to control risk taking. They can reallocate their savings away from their home country to a more protective system of a developed economy. In such a frame- work, we show that there is no univoque relationship between the information disclosure of risk management and excessive risk taking. This relationship depends on the degree of financial openness of the emergent country, which ultimately defines how e¤ective the market discipline is. Furthermore, we analyze the risk taking choice of banks in emergent economies in presence of deposit insurance. We find no monotone relationship between the likeliness of excessive risk taking of banks in the emerging country and the level of deposit insurance.

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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 09-08.

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Date of creation: 2009
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Handle: RePEc:luc:wpaper:09-08

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  1. Enrico Perotti, 2001. "Lessons from the Russian Meltdown: The Economics of Soft Legal Constraints," William Davidson Institute Working Papers Series 379, William Davidson Institute at the University of Michigan.
  2. G. Chiesa, 2001. "Competition and Regulation in Banking," Working Papers 397, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
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  6. Angkinand, Apanard & Wihlborg, Clas, 2010. "Deposit insurance coverage, ownership, and banks' risk-taking in emerging markets," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 252-274, March.
  7. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  8. Vives, Xavier, 2002. "External discipline and financial stability," European Economic Review, Elsevier, vol. 46(4-5), pages 821-828, May.
  9. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
  10. Roberto Steiner & Adolfo Barajas, 2000. "Depositor Behavior and Market Discipline in Colombia," IMF Working Papers 00/214, International Monetary Fund.
  11. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  12. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
  13. Chiesa, Gabriella, 2001. "Incentive-Based Lending Capacity, Competition and Regulation in Banking," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 28-53, January.
  14. Powell, Andrew, 2002. "A capital accord for emerging economies?," Policy Research Working Paper Series 2808, The World Bank.
  15. Hyytinen, Ari & Takalo, Tuomas, 2002. "Enchancing Bank Transparency : A Re-assessment," Discussion Papers 828, The Research Institute of the Finnish Economy.
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