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Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia

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  • Alexei Karas
  • William Pyle

    ()

  • Koen Schoors

Abstract

In nascent markets with relatively immature institutions, do depositors have the capacity to discipline banks with poor fundamentals? If so, what information specifically guides their response? Using a database from post-communist, pre-deposit-insurance Russia, we present evidence for quantity-based sanctioning of weaker banks by both firms and households, particularly after the 1998 financial crisis. More notably, the discipline that we observe is surprisingly sophisticated. Specifically, our evidence is consistent with the proposition that depositors interpret a bank’s deposit rate and capital as jointly reflecting its subsequent stability. In estimating a deposit supply function, we show that, particularly for poorly capitalized banks, interest rate increases run into diminishing, and eventually negative, returns in terms of deposit attraction.

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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0607.pdf
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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0607.

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Length: 37 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:mdl:mdlpap:0607

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Keywords: banking; market discipline;

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  9. 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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  12. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
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  15. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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Cited by:
  1. Claeys, Sophie & Vander Vennet, Rudi, 2008. "Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West," Economic Systems, Elsevier, vol. 32(2), pages 197-216, June.
  2. Andrievskaya, Irina & Semenova , Maria, 2013. "Market discipline and the Russian interbank market," BOFIT Discussion Papers 29/2013, Bank of Finland, Institute for Economies in Transition.
  3. Peresetsky , Anatoly, 2008. "Market Discipline and Deposit Insurance in Russia," BOFIT Discussion Papers 14/2008, Bank of Finland, Institute for Economies in Transition.

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