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

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Author Info
Alexei Karas
William Pyle ()
Koen Schoors

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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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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: Jul 2006
Date of revision:
Handle: RePEc:mdl:mdlpap:0607

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Related research
Keywords: banking; market discipline;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
P2 - Economic Systems - - Socialist Systems and Transition Economies

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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
  9. Caprio, Gerard & Honohan, Patrick, 2004. "Can the unsophisticated market provide discipline?," Policy Research Working Paper Series 3364, The World Bank. [Downloadable!]
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  12. Steve Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
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  14. Maria Soledad Martinez Peria, 2001. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Journal of Finance, American Finance Association, vol. 56(3), pages 1029-1051, 06. [Downloadable!] (restricted)
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