Are Banks Peer Disciplined? Evidence from Post-Crisis Russia

Abstract

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.

Exposure to interbank market and risk-taking by Mexican banks

“…Similar findings were found in the Portuguese and Italian interbank market (Cocco et al, 2009;Angelini et al, 2009). In Russia, banks with higher capital adequacy ratios enjoy lower interest rates (Semenova and Andrievskaya, 2012). These are related concerns, but outside of the limits of the present research.…”

“…It is assumed that the error term is not serially correlated and Sargan's over-identification test is employed to validate the instruments. King (2008) and Semenova and Andrievskaya (2012) to test the market discipline hypothesis in the interbank market used a Heckman correction because some banks do not participate in the interbank market, and it is necessary to control for real-zero exposure. A Heckman model is appropriate for markets with many banks, where is complicated to know if a bank, often a small bank, really is not operating in the interbank market.…”

“…Thus, the focus of this research is on the bank risk-exposure nexus. Note that this article does not attempt to test the mechanisms of market discipline in the interbank market (price, quantity, and maturity), which have been tested in USA (Furfine, 2001;King, 2008), Portugal (Cocco et al, 2009), Italy (Angelini et al, 2009), and Russia (Semenova and Andrievskaya, 2012).…”

Market Discipline and the Russian Interbank Market

“…Previous studies devoted to market discipline in Russia focus largely on bank deposits. 1 To the best of our knowledge, our earlier study is the only one that considers market discipline in the Russian interbank market (Semenova and Andrievskaya, 2012). That paper looks at the post-crisis period and deals solely with determining the existence of market discipline.…”

Market Discipline in the Interbank Market: Evidence from Russia

“…1 The only research that touches upon the subject of market discipline in the Russian interbank market was conducted by Semenova and Andrievskaya (2012). However, their paper looks only at the postcrisis period and deals solely with determining the existence of market discipline.…”