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Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia

Author

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  • Alexei Karas
  • William Pyle

    ()

  • Koen Schoors

Abstract

In nascent markets with relatively immature institutions, do depositors have the capacity to discipline banks with poor fundamentals? If so, what information specifically guides their response? Using a database from post-communist, pre-deposit-insurance Russia, we present evidence for quantity-based sanctioning of weaker banks by both firms and households, particularly after the 1998 financial crisis. More notably, the discipline that we observe is surprisingly sophisticated. Specifically, our evidence is consistent with the proposition that depositors interpret a bank’s deposit rate and capital as jointly reflecting its subsequent stability. In estimating a deposit supply function, we show that, particularly for poorly capitalized banks, interest rate increases run into diminishing, and eventually negative, returns in terms of deposit attraction.

Suggested Citation

  • Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," Middlebury College Working Paper Series 0607, Middlebury College, Department of Economics.
  • Handle: RePEc:mdl:mdlpap:0607
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    File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0607.pdf
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    References listed on IDEAS

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    Cited by:

    1. Claeys, Sophie & Vander Vennet, Rudi, 2008. "Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West," Economic Systems, Elsevier, vol. 32(2), pages 197-216, June.
    2. Peresetsky, Anatoly, 2008. "Market discipline and deposit insurance in Russia," BOFIT Discussion Papers 14/2008, Bank of Finland, Institute for Economies in Transition.
    3. 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.
    4. 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.

    More about this item

    Keywords

    banking; market discipline;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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