Market Discipline During Crisis: Evidence from Bank Depositors in Transition Countries

Abstract

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in worse financial conditions than their subsidiaries. This situation created a unique opportunity to study new aspects of depositor discipline. In this article, we investigate whether depositors flexibly accommodated to the changing sources of risk. We also analyse the informational foundations of depositors' decisions. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors' actions were much more strongly influenced by press rumours concerning parent companies than by fundamentals, and that the impact of rumours on deposit growth rates was highly economically significant. Additionally, we document that public aid announcements were interpreted by depositors primarily as a confirmation of a parent company's financial distress. Our results have important policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies. JEL classification: G21, G28

Bank Diversification and Overall Financial Strength: International Evidence

“…Using a sample of manufacturing firms operating in six Asian countries, they conclude that diversification improves performance only in the least developed environments. 14 The use of 2007 as a cut-off point is consistent with Hasan et al (2013) and Anginer et al (2014), among several others. 0.009 ** 0.010 ** 0.010 ** 0.009 * 0.009 ** 0.009 * (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) CREDIT −0.005 *** −0.005 *** −0.005 *** −0.005 *** −0.005 *** −0.005 *** (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) CONC −0.006 *** −0.006 *** −0.005 *** −0.004 *** −0.005 *** −0.006 *** (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) TBANKZ 0.014 *** 0.014 *** 0.013 *** 0.012 *** 0.014 *** 0.014 *** (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) CRISIS −0.140 *** −0.231 *** −0.124 *** −0.613 *** −0.138 *** −0.134 *** (0 Notes: *** Statistically significant at the 1% level, ** Statistically significant at the 5% level, * Statistically significant at the 10% level, Robust standard errors in parenthesis; Estimations obtained from a fixed effects model with robust standard errors clustered at the bank level; Variables are defined in Appendix II.…”

Financial Crisis, Macroprudential Policies and Depositor Discipline

“…Among the papers in this part of literature, (Opiela, 2004) finds that in the 18-month period directly preceding the 1997 crisis of Thailand, the disciplining role of depositors have been closer indicating that depositors' motivation did not show drastic changes. Peria and Schmukler (2001) show that in Latin American countries, deposit growth rates and deposit interest costs have been more sensitive to bank risks in post-crisis periods, which is known as the wake-up-call effect (Hasan et al, 2013). Levy-Yeyati et al (2004) note that during the crisis periods that occurred in Argentina and Uruguay, macroeconomic shocks have been the main concerns for depositors whereas depositors' sensitivities to bank-specific factors weakened significantly.…”

“…Even though these measures have been relatively successful in relieving the uncertainties in the aftermath of the Lehman's collapse, the tendency toward excessive risk-taking has created other concerns. Against the backdrop of low rates, tightened credit spreads and record-low volatilities, macroprudential policies have been accepted as a desirable antidote to the growing worries that sustained low rates will eventually lead to financial instability (De Nicolò et al, 2012;Claessens et al, 2013;Hasan et al, 2013). This perspective suggests that macroprudential policies are effective to tame the credit cycle, increasing the likelihood that we have entered after a sustained period of lower structural volatility.…”

Depositors Discipline through Interest Costs during Good and Bad Times: the Role of the Guarantor of Last Resort1

“…However, Bertay et al (2013) do not confirm this observation and find that large international banks are subject to greater market discipline. More recently, Hasan et al (2013) examine depositor discipline in Central and Eastern European countries and find that the recent crisis did not alter the sensitivity of deposit growth rates to accounting risk measures.…”

“…These studies are important because they show that there is a link between market discipline and the financial stability of an institution that guarantees deposits. Second, several authors use cross-country samples to provide evidence of monitoring by depositors (Demirgüç- Huizinga 2004, 2013;Berger and Turk-Ariss 2010;Cubillas et al 2012;Hasan et al 2013) and market influence on banks' decisions (Nier and Baumann 2006;Fonseca and González 2010;Forssbaeck 2011;Distinguin et al 2013). These studies constitute a natural basis for comparisons because we also use a cross-country setting.…”