No abstract

Market discipline refers to the role of depositors and other providers of funds in monitoring banks' risk taking and, based on this monitoring, impose penalties on them. The mechanisms of market discipline, that is, the ways in which depositors can penalize riskier banks, are three: (i) the cost of borrowing, demanding higher interest rates from riskier banks; (ii) the amount of deposits, withdrawing resources from riskier banks; and (iii) maturity, keeping their deposits in shorter terms the greater the perceived risk. This study aims to examine the phenomenon of market discipline in Brazil and also whether the increase in deposit insurance coverage in 2013 and the role of financial intermediaries in the funding market changed this discipline. The database comprises accounting information of Brazilian banks from 2010 to 2017. The parameters were calculated using the Systemic Generalized Method of Moments (GMM-Sys). Based on the analyses performed, it was concluded that in Brazil there is evidence of market discipline through the cost of funding and maturity, with the size of banks and their capitalization as the main disciplining factors. Deposit insurance has reduced market discipline for both mechanisms, while intermediaries have decreased the size and capitalization advantages of banks. The results did not demonstrate the existence of market discipline through the quantity mechanism. Brokerage firms also reduced the size and capitalization advantages of this mechanism. However, significant indicators in the market discipline literature, mainly related to banks' credit portfolios, were not relevant in the Brazilian market, indicating that discipline can be enhanced. The results were similar in the analysis excluding "too-big-to-fail" banks, with slightly higher parameters, indicating that the discipline is stronger for smaller banks. This work can help regulators and banks to understand the deposit market, the participation of depositors, insurance and intermediaries, contributing to the definition of insurance coverage, the incentives for new intermediaries and the design of supervisory procedures.