Regulatory Forbearance and Depositor Market Discipline: Evidence From Savings Banks in Korea

Abstract

This paper investigates whether regulatory forbearance for savings banks in Korea affects the market discipline of depositors using data from 2000 to 2010, which are characterized by a series of exits of savings banks. We find that depositors' sensitivity to the savings banks' asset quality decreases when there is regulatory forbearance for failing savings banks. This forbearance effect is also observed in the behavior of the depositors of the neighboring savings banks in the same business area. These results suggest that regulatory forbearance may cause depositors to misjudge bank risks, increasing the expected costs of bank failure. (JEL G21, G28)

Bank risk‐taking and market discipline: Evidence from CoCo bonds in Korea

“…This supports the lack of incentive explanation. In addition, our results depict that the asset size of banks is negatively related to the level of bond spreads, and supports the TBTF hypothesis and the results of Choi and Sohn (2014), who, using the data from the saving bank crisis in Korea, show that the regulatory control weakens market discipline and suggest that the expectation of bailout weakens the market discipline in Korea.…”

When time is not on our side: The costs of regulatory forbearance in the closure of insolvent banks

“…And Choi and Sohn (2014) analyze the effect of forbearance in Korea: When regulators postpone PCA for insolvent savings banks, the strength of depositor market discipline decreases not only at the insolvent bank but also at other banks that are operating in the same market.…”