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Depositors' selection of banks and the deposit insurance system in Japan: Empirical evidence and its policy implications

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  • Kotaro TSURU

Abstract

This paper studies market discipline on banks by depositors in Japan. We stress the importance of depositors' selection of banks, which together with regulatory and supervisory schemes can strengthen corporate governance in banking. The effectiveness of depositor discipline is, however, weakened by the existence of a deposit insurance system. In order to examine the effectiveness of depositor discipline in Japan, we used a sample of 120 banks during the period FY 1998 to FY 2001, and found that the depositors' tendency to select banks based on asset risk exposure clearly strengthened ahead of the partial lift of the freeze on the payoff system (April 2002). At the same time, depositors, expecting "too-big-to-fail" policy by the government, tended to opt for larger banks regardless of their risk exposures and performance. The latter selection mechanism, however, would not offer good discipline on banks. Makeshift solutions for containing banking crises such as delaying the full introduction of the payment system and promoting bank mergers may invite further moral hazard among banks and potentially lead to destabilization of the financial system.

Suggested Citation

  • Kotaro TSURU, 2003. "Depositors' selection of banks and the deposit insurance system in Japan: Empirical evidence and its policy implications," Discussion papers 03024, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:03024
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    Cited by:

    1. MURATA Keiko & HORI Masahiro, 2004. "End Of The Convoy System And The Surge Of Market Discipline: Evidence From Japanese Small Financial Institutions," ESRI Discussion paper series 105, Economic and Social Research Institute (ESRI).
    2. Besstremyannaya, Galina, 2017. "Heterogeneous effect of the global financial crisis and the Great East Japan Earthquake on costs of Japanese banks," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 66-89.
    3. Lukasz Kozlowski, 2018. "The Halo Effect in Banking: Evidence from Local Markets," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(5), pages 416-441, October.
    4. Shizuka Sekita, 2005. "Does Depositors' Discipline by Households Exist? (in Japanese)," Discussion Papers in Economics and Business 05-10, Osaka University, Graduate School of Economics.
    5. Keiko Murata & Masahiro Hori, 2006. "Do Small Depositors Exit From Bad Banks? Evidence From Small Financial Institutions In Japan," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 260-278, June.
    6. HORI Masahiro & ITO Yasuaki & MURATA Keiko, 2005. "Do Depositors Respond to Bank Risks as Expected? Evidence from Japanese Financial Institutions in the Banking Crisis," ESRI Discussion paper series 151, Economic and Social Research Institute (ESRI).
    7. Noriko Inakura & Satoshi Shimizutani, 2010. "Deposit insurance and depositor discipline: direct evidence on bank switching behaviour in Japan," Applied Economics, Taylor & Francis Journals, vol. 42(26), pages 3401-3415.
    8. Takeo Hoshi, 2006. "Comment: Do Small Depositors Exit From Bad Banks? Evidence From Small Financial Institutions In Japan," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 279-281, June.

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