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Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico

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  • Martinez Peria, Maria Soledad
  • Schmukler, Sergio L.

Abstract

The authors examine the banking industries of Argentina, Chile, and Mexico to see if market discipline existed there in the 1980s and 1990s. Using a set of bank panel data, they test for the presence of market discipline by studying whether depositors punish risky banks by withdrawing their deposits. They find that across countries and across deposit insurance schemes, market discipline exists even among small insured depositors - who punish risky banks by withdrawing their deposits. Standardized coefficients and variance decomposition of deposits indicate that bank fundamentals are at least as important as other factors affecting deposits. Generalized Method of Moments estimates confirm that the results are robust to the potential endogeneity of bank fundamentals.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2058.

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Date of creation: 28 Feb 1999
Date of revision:
Handle: RePEc:wbk:wbrwps:2058

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Related research

Keywords: Financial Intermediation; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Rural Finance; Banks&Banking Reform; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Financial Economics; Insurance&Risk Mitigation;

References

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  1. 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.
  2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  3. Gorton, Gary & Santomero, Anthony M, 1990. "Market Discipline and Bank Subordinated Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 119-28, February.
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  13. repec:fth:inadeb:321 is not listed on IDEAS
  14. Allen N. Berger, 1991. "Market discipline in banking," Proceedings, Federal Reserve Bank of Chicago, pages 419-437.
  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, vol. 30(3), pages 273-305, August.
  16. Robert Billings & Brenda González-Hermosillo & Ceyla Pazarbasioglu, 1996. "Banking System Fragility: Likelihood Versus Timing of Failure - An Application to the Mexican Financial Crisis," IMF Working Papers 96/142, International Monetary Fund.
  17. Avery, Robert B & Belton, Terrence M & Goldberg, Michael A, 1988. "Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 597-610, November.
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