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Financial contagion and depositor monitoring

  • Hasman, Augusto
  • Samartín, Margarita
  • Bommel, Jos Van

This paper analyzes market discipline in a many-bank economy where contagion and bank runs interact. We present a model with differently-informed depositors, where those depositors that are more informed have incentives to monitor banks’ investments. It is shown that when banks are undercapitalized, and the probability of success of the risky asset is low, depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment.The results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378426613001349
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 8 ()
Pages: 3076-3084

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:3076-3084
DOI: 10.1016/j.jbankfin.2013.02.037
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Margarita Samartin & Gerald Dwyer, 2004. "Why do Banks Promise to Pay Par on Demand?," 2004 Meeting Papers 180c, Society for Economic Dynamics.
  2. Samartin, Margarita, 2003. "Should bank runs be prevented?," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 977-1000, May.
  3. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
  4. Hadad, Muliaman D. & Agusman, Agusman & Monroe, Gary S. & Gasbarro, Dominic & Zumwalt, James Kenton, 2011. "Market discipline, financial crisis and regulatory changes: Evidence from Indonesian banks," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1552-1562, June.
  5. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  6. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  7. James R. Barth & Gerard Caprio, Jr. & Ross Levine, 2002. "Bank Regulation and Supervision: What Works Best?," NBER Working Papers 9323, National Bureau of Economic Research, Inc.
  8. Douglas W. Diamond & Raghuram G. Rajan, 2003. "Money in a Theory of Banking," NBER Working Papers 10070, National Bureau of Economic Research, Inc.
  9. Castiglionesi, Fabio, 2007. "Financial contagion and the role of the central bank," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 81-101, January.
  10. Sandro Brusco & Fabio Castiglionesi, 2005. "Liquidity Coinsurance, Moral Hazard and Financial Contagion," Department of Economics Working Papers 05-12, Stony Brook University, Department of Economics.
  11. Gary Gorton & Lixin Huang, 2002. "Banking Panics and the Origin of Central Banking," NBER Working Papers 9137, National Bureau of Economic Research, Inc.
  12. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, vol. 60(2), pages 615-647, 04.
  13. Mark J. Flannery, 1991. "Debt maturity and the deadweight cost of leverage: optimally financing banking firms," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  14. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
  15. Hasman, Augusto & Samartín, Margarita, 2008. "Information acquisition and financial contagion," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2136-2147, October.
  16. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Banks and Liquidity," American Economic Review, American Economic Association, vol. 91(2), pages 422-425, May.
  17. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
  18. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  19. Kaoru Hosono & Hiroko Iwaki & Kotaro Tsuru, 2005. "Banking Crises, Deposit Insurance, and Market Discipline: Lessons from the Asian Crises," Discussion papers 05029, Research Institute of Economy, Trade and Industry (RIETI).
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