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Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech republic

  • Jan Hanousek

    (CERGE-EI)

  • Gerard Roland

    (UC Berkeley ; ECARES ; CEPR ; CERGE-EI)

We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.

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File URL: http://econwpa.repec.org/eps/em/papers/0203/0203004.pdf
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Paper provided by EconWPA in its series Econometrics with number 0203004.

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Length: 28 pages
Date of creation: 02 Mar 2002
Date of revision:
Handle: RePEc:wpa:wuwpem:0203004
Note: Type of Document - Acrobat PDF; pages: 28 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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