We analyze whether a depositor's familiarity with a bank affects depositor behavior during a financial crisis. Familiarity is measured by the presence of regional or local cues in the bank's name, while depositor behavior is considered in terms of depositor sensitivity to observable bank risk (market discipline exerted by depositors). Using the 2001-2010 bank-level and region-level data for Russia, we show the evidence that depositors use quantity-based discipline on all banks in the sample. The evidence of a price-based discipline mechanism, however, is virtually absent. We find that depositors of familiar banks were less sensitive to bank risk after a financial crisis than depositors at unfamiliar banks. To assure the results are driven by familiarity bias and not implicit support of regional governments to banks with regional cues in their names, we interact the variables with measures of trust in local governments and regional affinity. We find a "flight to familiarity" effect strongly present in regions with strong regional affinity, while the effect is rejected in regions with greater trust in regional and local governments. This suggests that the results are driven by familiarity rather than implicit protection from trusted regional or local governments.
Market discipline is usually studied in the retail or the corporate deposit markets, while the interbank loan market is disregarded. Banks' abilities to exert market discipline are taken for granted, as they are expected to have the expertise to assess correctly the riskiness of other banks. However, the "crises of trust" (as one in 2004 in Russia) create some doubts as to whether efficient peer monitoring and peer discipline exist: the interbank loan market may be frozen in response to external information which is unrelated to the banks' current reliability. This seems to be one of the reasons for the interbank loan markets being extremely fragile during periods of financial instability, undermining the smooth functioning of the whole banking system, as banks are tightly interconnected. We provide some evidence for market discipline in the Russian interbank market. We show that the only disciplinary mechanism that functions is a price-based one: more reliable banks enjoy lower interest rates. The quantitative discipline functions only for the largest borrowers. In general, decisions on credit limits are based not on changes in another bank's riskiness but on other information like reputation, soft information or public announcements that may be even unrelated to a particular bank.
Market discipline in the personal deposit market is of great importance for regulators. In developing economies, which rely much and are dependent on the dollar and euro, changes in the currency structure of the deposits may be strategic and work as an additional disciplining mechanism. Our study sheds light on this mechanism of currency shifts in the Russian market for personal deposits. Using data on more than 900 Russian banks for 2005-2015, we provide evidence that less risky banks-at least in terms of capital adequacy and liquidity-demonstrate higher growth of both the volume and the share of deposits denominated in foreign currency, even when the exchange rate volatility component is extracted. This mechanism continued working during the financial crisis of 2008-2009.
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