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Market discipline by bank creditors during the 2008–2010 crisis

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  • Bennett, Rosalind L.
  • Hwa, Vivian
  • Kwast, Myron L.

Abstract

We investigate whether uninsured depositors, insured depositors, and general creditors exhibit evidence of quantity market discipline during the recent financial crisis. To establish which types of creditors expect to incur loss, we evaluate the FDIC's expectations about losses to creditors at banks that failed between 2008 and 2010. Our results show that quantity market discipline tends to begin far enough in advance to signal to both banks and supervisors that corrective actions can and should be taken. Furthermore, creditors are able to distinguish between banks of different risk levels. Our findings support several policy implications for encouraging market discipline.

Suggested Citation

  • Bennett, Rosalind L. & Hwa, Vivian & Kwast, Myron L., 2015. "Market discipline by bank creditors during the 2008–2010 crisis," Journal of Financial Stability, Elsevier, vol. 20(C), pages 51-69.
  • Handle: RePEc:eee:finsta:v:20:y:2015:i:c:p:51-69
    DOI: 10.1016/j.jfs.2015.06.003
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:revfin:v:34:y:2017:i:c:p:10-32 is not listed on IDEAS
    2. Lamers, Martien, 2015. "Depositor discipline and bank failures in local markets during the financial crisis," Research Report 15007-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    3. Kaposty, Florian & Pfingsten, Andreas & Domikowsky, Christian, 2017. "Market Discipline, Deposit Insurance, and Competitive Advantages: Evidence from the Financial Crisis," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168146, Verein für Socialpolitik / German Economic Association.
    4. Barroso, Ricardo Vieira & Lima, Joaquim Ignacio Alves Vasconcellos & Lucchetti, Alexandre Henrique & Cajueiro, Daniel Oliveira, 2016. "Interbank network and regulation policies: an analysis through agent-based simulations with adaptive learning," MPRA Paper 73308, University Library of Munich, Germany.
    5. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2017. "How the corporate governance mechanisms affect bank risk taking," MPRA Paper 78137, University Library of Munich, Germany.

    More about this item

    Keywords

    Bank failures; Financial crisis; Market discipline;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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