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Market discipline and bank efficiency

  • Uchida, Hirofumi
  • Satake, Mitsuhiko

This paper investigates whether depositors and market investors exert disciplinary pressure on bank management in terms of efficiency improvement. We find that banks with more outstanding deposits are more cost-efficient, although little effect is found with respect to profit efficiency. This implies that depositors, the primary providers of funds to banks, likely play an important role in disciplining bank management, at least in terms of enforcing efficient use of inputs. Market discipline has garnered increasing attention as a mechanism to ensure bank soundness. Our results imply that depositors, the largest creditors to banks, may be of primary importance in this mechanism.

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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 19 (2009)
Issue (Month): 5 (December)
Pages: 792-802

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Handle: RePEc:eee:intfin:v:19:y:2009:i:5:p:792-802
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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