Market Discipline by Thrift Depositors

Park, Sangkyun; Peristiani, Stavros

doi:10.2307/2601105

Cited by 284 publications

(189 citation statements)

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“…These are a capital asset ratio (CARA-TIO) for assessing the insolvency risk of an individual bank, the ratio of non-performing loans to total capital (BADTK) as a proxy to the quality of loans, a liquid assets to total deposits ratio (LIQDEP) for liquidity risk, the share of short-term credits in total assets (SHCREA) to reflect the maturity of loans and borrowers' confidence in the bank, a before-tax return on assets (ROA) and expense ratio (EXPENSE) to consider the profitability of a bank, and the difference between implied interest rates on credits and deposits (SPREAD) to measure interest rate risk. Similar indicators are used by Park and Peristiani (1998), Barajas and Steiner (2000), and Martinez- Peria and Schmukler (2001). Rojas-Suarez (2001) found that banks that hold more loans in their portfolio relative to other banks are riskier, and that spread is another indicator of risky banks in developing countries.…”

Section: Methodology (A) a Model For Depositor And Borrower Disciplinementioning

confidence: 83%

“…There are few studies on the change in the quantity of bank deposits as it relates to the apparent default risk of a bank. For example, Park (1995) and Park and Peristiani (1998) provided significant evidence that riskier US thrifts experienced smaller deposit growth during the 1980s. On the contrary, there is ample evidence for the market's ability to recognize default risk in bank obligations based on the second measure of market discipline.…”

Section: (B) the Deposit Insurance System In Turkeymentioning

confidence: 99%

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Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?

Önder

Ozyildirim

2008

World Development

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Summary. -Turkey experienced a massive banking crisis in February 2001, resulting in the loss of more than a thousand managerial jobs and the closure of 21% of all bank branches in the market. In this paper, we study the behavior of the market and the banks in Turkey before the crisis, from 1988 to 2000, which includes the period of full deposit insurance. The empirical results showed that not only depositors but also borrowers reacted negatively to risky banks and punished them even more during the period of generous government guarantee. However, in the same period, banks were found to increase their moral hazard behavior significantly. Although the International Monetary Fund and the World Bank recommend explicit deposit insurance for developing countries, the findings of this paper suggest that deposit insurance may not be an effective policy tool to improve market confidence, and it does not guarantee a stable economic environment even when the market reacts negatively to the moral hazard behavior of banks.

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Section: Methodology (A) a Model For Depositor And Borrower Disciplinementioning

confidence: 83%

Section: (B) the Deposit Insurance System In Turkeymentioning

confidence: 99%

Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?

Önder

Ozyildirim

2008

World Development

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“…Further, more than any other measure, the capital ratio is extensively used as a proxy for bank risk taking in market discipline studies, in both developed and emerging market economies (e.g., Hannan and Hanweck 1988, Park and Peristiani 1998, Martinez Peria and Schmukler 2001, Karas et al 2013, Berger and Turk-Ariss 2014. We also refer to and who found that only bank capital proved to be unambiguously leading to depositor discipline in the Turkish conventional banking market.…”

Section: Subsequently In December 2005 Anadolu Finans and Family Fimentioning

confidence: 99%

Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

et al. 2016

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Although it has been intensively claimed that Islamic banks are more subject to market discipline, the empirical literature is surprisingly mute on this topic. To fill this gap and to verify the conjecture that Islamic bank depositors are indeed able to monitor and discipline their banks, we use Turkey as a test setting. The theory of market discipline predicts that when excessive risk taking occurs, depositors will ask higher returns on their deposits or withdraw their funds. We look at the effect of the deposit insurance reform in which the dual deposit insurance was revised and all banks were put under the same deposit insurance company in December 2005. This gives us a natural experiment in which the effect of the reform can be compared for the treatment group (i.e., Islamic banks) and control group (i.e., conventional banks). We find that the deposit insurance reform has increased market discipline in the Turkish Islamic banking sector. This reform may have upset the sensitivities of the religiously inspired depositors, and perhaps more importantly it might have terminated the existing mutual supervision and support among Islamic banks.JEL codes: G23, G28, O52

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“…Investors are concerned with expected profitability, adjusted for the degree to which the bank's profitability systematically varies with the capital market (the beta of the CAPM). By way of contrast, for little-diversified investors as well as ordinary consumers holding deposits, the bank's overall risk is relevant, which importantly includes the risk of insolvency [Goldberg and Hudgins (1996), Park andPeristiani (1998), Jordan (2000), Goldberg and Hudgins (2002)]. Option Pricing Theory (OPT) shows that due to their limited liability, shareholders of the bank in fact have a put option that is written by the other stakeholders (notably creditors, among them depositors) of the bank [Merton (1974), Jensen and Meckling (1976), Merton (1977)].…”

Section: Solvency Regulation Of Banksmentioning

confidence: 99%

“…In response to revised estimates, they demand a higher rate of interest from solvent banks, driving up the cost of refinancing. There is a substantial body of empirical research substantiating this claim [Flannery and Sorescu (1996), Park and Peristiani (1998), Covitz et al (2004)]. …”

Section: Solvency Regulation Of Banksmentioning

confidence: 99%

Solvency Regulation of Banks and Insurers: A Two-Pronged Critique

Zweifel

2015

International Journal of Financial Research

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This paper puts forth two models, one of a bank and one of an insurer. Their divisions responsible for investment (and risk underwriting, respectively) seek to maximize the expected risk-adjusted rate of return on capital (RAROC). For the bank, higher solvency lowers the cost of refinancing; for the insurer, it attracts more premium income. In both cases, however, higher solvency ties costly capital. Sequential decision making is tracked over three periods. In period 1, exogenous changes in expected returns and in volatility occur, each suggesting optimal adjustments in solvency. However, there can be only one adjustment, which in period 3 creates an endogenous trade-off between expected returns and volatility. This tradeoff is shown to involve parameters that differ between banks and insurers, calling for bank-specific and insurance-specific solvency regulation. In addition, Basel I and II (Solvency I and II, respectively) are shown to modify this tradeoff, inducing senior management of both banks and insurers to opt for higher volatility and lower solvency than otherwise. Therefore, existing solvency regulation can run counter their stated objective in both cases, which quite likely is also true of Basel III and Solvency III.

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Market Discipline by Thrift Depositors

Cited by 284 publications

References 0 publications

Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?

Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?

Islamic Banks, Deposit Insurance Reform, and Market Discipline: Evidence from a Natural Framework

Solvency Regulation of Banks and Insurers: A Two-Pronged Critique

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