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Bank Regulation and Market Discipline around the World

Author

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  • Kaoru Hosono
  • Hiroko Iwaki
  • Kotaro Tsuru

Abstract

This paper investigates the effectiveness of depositor discipline and its relationship with various bank regulations and supervisions using a panel of about 17,000 bank-year data during 1992-2002 around 60 countries. We first theoretically show that deposit interest rate and its sensitivity to bank risk depend on the bank insolvency risk and the fraction of deposit protection, among others. Then we find evidence that strict regulations on bank activities and powerful supervisory authorities tend to reduce deposit interest rate and its sensitivity to bank risk. We interpret our results as suggesting that strict regulations on bank activities are likely to be associated with generous bailout of an insolvent bank, resulting in weak market discipline and a fragile banking system.

Suggested Citation

  • Kaoru Hosono & Hiroko Iwaki & Kotaro Tsuru, 2004. "Bank Regulation and Market Discipline around the World," Discussion papers 04031, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:04031
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    File URL: https://www.rieti.go.jp/jp/publications/dp/04e031.pdf
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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. Andrievskaya & Semenova, 2015. "Market Discipline in the Interbank Market: Evidence from Russia," Eastern European Economics, Taylor & Francis Journals, vol. 53(2), pages 69-98, March.
    3. repec:mes:eaeuec:v:53:y:2015:i:2:p:69-98 is not listed on IDEAS
    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 and Osaka School of International Public Policy (OSIPP).
    5. 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).
    6. 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.
    7. Semenova Maria, 2007. "How depositors discipline banks: the case of Russia," EERC Working Paper Series 07-02e, EERC Research Network, Russia and CIS.
    8. 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).
    9. Maria Semenova & Andrey Shapkin, 2016. "Currency Shifts as a Market Discipline Device: The Case of the Russian Market for Personal Deposits," HSE Working papers WP BRP 57/FE/2016, National Research University Higher School of Economics.
    10. Andrievskaya, Irina & Semenova, Maria, 2013. "Market discipline and the Russian interbank market," BOFIT Discussion Papers 29/2013, Bank of Finland, Institute for Economies in Transition.

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