Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia
AbstractIn 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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Bibliographic InfoPaper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0607.
Length: 37 pages
Date of creation: Apr 2006
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banking; market discipline;
Other versions of this item:
- Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," William Davidson Institute Working Papers Series wp829, William Davidson Institute at the University of Michigan.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- P2 - Economic Systems - - Socialist Systems and Transition Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-13 (All new papers)
- NEP-COM-2006-05-13 (Industrial Competition)
- NEP-FIN-2006-05-13 (Finance)
- NEP-FMK-2006-05-13 (Financial Markets)
- NEP-IAS-2006-05-13 (Insurance Economics)
- NEP-TRA-2006-05-13 (Transition Economics)
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