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Depositor discipline in Indian banking: Separating facts from folklore

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  • Ghosh, Saibal
  • Das, Abhiman

Abstract

The paper traces the determinants of depositor discipline in Indian banking. Using data for the period 1997:1 to 2002:4, the findings reveal that, while bank-specific factors are dominant in case of state-owned banks, systemic variables tend to overwhelm bank-specific factors in explaining behaviour of depositors of private banks. In case of private and foreign banks, policy announcements have an important bearing on the dependent variable. For state-owned banks, larger asset translates into higher deposit growth, suggesting that depositors are sensitive to the ‘too-big-to-fail’ effect. Finally, insured depositors tend to exercise discipline by compelling banks to pay a higher price on deposits.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17427.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:17427

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Keywords: depositor discipline; contagion effect; deposit insurance; banking; India;

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References

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  1. Ellis, David M. & Flannery, Mark J., 1992. "Does the debt market assess large banks, risk? : Time series evidence from money center CDs," Journal of Monetary Economics, Elsevier, Elsevier, vol. 30(3), pages 481-502, December.
  2. Saibal Ghosh & D. M. Nachane & Aditya Narain & Satyananda Sahoo, 2003. "Capital requirements and bank behaviour: an empirical analysis of Indian public sector banks," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(2), pages 145-156.
  3. Bhide, M G & Prasad, A & Ghosh, Saibal, 2001. "Emerging Challenges in Indian Banking," MPRA Paper, University Library of Munich, Germany 1711, University Library of Munich, Germany.
  4. Urs Birchler & Andréa M. Maechler, 2001. "Do Depositors Discipline Swiss Banks?," Working Papers, Swiss National Bank, Study Center Gerzensee 01.06, Swiss National Bank, Study Center Gerzensee.
  5. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 641-670.
  6. 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, Central Bank of Chile, 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.
  7. Alan Greenspan, 2001. "Harnessing market discipline," The Region, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sep, pages 6-7.
  8. Park, Sangkyun, 1995. "Market discipline by depositors: Evidence from reduced-form equations," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 35(35), pages 497-514.
  9. Roberto Steiner & Adolfo Barajas, 2000. "Depositor Behavior and Market Discipline in Colombia," IMF Working Papers, International Monetary Fund 00/214, International Monetary Fund.
  10. J. Caprio & P. Honohan, 2000. "Restoring Banking Stability: Beyond Supervised Capital Requirements," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 68(1), pages 5-22, 03.
  11. Park, Sangkyun & Peristiani, Stavros, 1998. "Market Discipline by Thrift Depositors," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 347-64, August.
  12. Frederic S. Mishkin, 2001. "Prudential Supervision: Why Is It Important and What Are the Issues?," NBER Chapters, National Bureau of Economic Research, Inc, in: Prudential Supervision: What Works and What Doesn't, pages 1-30 National Bureau of Economic Research, Inc.
  13. Jagtiani, Julapa & Lemieux, Catharine, 2001. "Market discipline prior to bank failure," Journal of Economics and Business, Elsevier, Elsevier, vol. 53(2-3), pages 313-324.
  14. Demetriades, Panicos O & Luintel, Kul B, 1996. "Financial Development, Economic Growth and Banker Sector Controls: Evidence from India," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(435), pages 359-74, March.
  15. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  16. 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, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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