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Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies

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  • Sergio L. Schmukler
  • Eduardo Levy-Yeyati
  • Maria Soledad Martinez Peria

Abstract

This paper shows that systemic risk exerts a significant impact on the behavior of depositors, sometimes overshadowing their responses to standard bank fundamentals. Systemic risk can affect market discipline both regardless of and through bank fundamentals. First, worsening systemic conditions can directly threaten the value of deposits via dual agency problems. Second, systemic shocks can lead to a future deterioration of fundamentals and affect the exposure to systemic risk, not captured by standard fundamentals. Using data from the recent banking crises in Argentina and Uruguay, we show that market discipline is indeed quite robust once systemic risk is factored in. As the latter increases, the informational content of past fundamentals declines. These episodes also illustrate how few systemic shocks can trigger a run irrespective of ex-ante fundamentals. Overall, the evidence suggests that, in emerging economies, the notion of market discipline needs to account for systemic risk

Suggested Citation

  • Sergio L. Schmukler & Eduardo Levy-Yeyati & Maria Soledad Martinez Peria, 2004. "Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies," Econometric Society 2004 Latin American Meetings 318, Econometric Society.
  • Handle: RePEc:ecm:latm04:318
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bednarek, Peter & Dinger, Valeriya & von Westernhagen, Natalja, 2015. "Fundamentals matter: Idiosyncratic shocks and interbank relations," Discussion Papers 44/2015, Deutsche Bundesbank.
    2. Hasan, Iftekhar & Jackowicz, Krzysztof & Kowalewski, Oskar & Kozłowski, Łukasz, 2013. "Market discipline during crisis: Evidence from bank depositors in transition countries," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5436-5451.
    3. Agustin Villar, 2006. "Is financial stability policy now better placed to prevent systemic banking crises?," BIS Papers chapters,in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 99-122 Bank for International Settlements.
    4. Ghosh, Saibal & Das, Abhiman, 2005. "Market Discipline, Capital Adequacy and Bank Behaviour: Theory and Indian Evidence," MPRA Paper 17398, University Library of Munich, Germany.
    5. Renzo G Avesani, 2005. "FIRST; A Market-Based Approach to Evaluate Financial System Risk and Stability," IMF Working Papers 05/232, International Monetary Fund.
    6. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization; Is it for Real?," IMF Working Papers 05/187, International Monetary Fund.
    7. Eduardo Levy Yeyati, 2004. "Dollars, Debt and the IFIs: Dedollarizing Multilateral Lending," Business School Working Papers dedollmultlending, Universidad Torcuato Di Tella.
    8. Eduardo Levy Yeyati & Maria Soledad Martinez Peria & Sergio Schmukler, 2004. "Market Discipline in Emerging Economies: Beyond Bank Fundamentals," Business School Working Papers marketdiscipline, Universidad Torcuato Di Tella.
    9. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies; How Much is theprivate Sector Affected?," IMF Working Papers 09/29, International Monetary Fund.

    More about this item

    Keywords

    market discipline; idiosyncratic risk; systemic risk; emerging markets; depositor behavior; bank run; banking crises;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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