Market discipline by depositors: impact of deposit insurance on the Indonesian banking sector

Miki Hamada

No 292, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This paper investigates market discipline by depositors in the Indonesian banking sector. Does depositor discipline fulfill its role in Indonesia? Does deposit insurance affect depositor behavior thereby imposing discipline on banks? These questions are empirically examined using panel data on Indonesian commercial banks from 1998 to 2009. In Indonesia deposit insurance was introduced in 2005. Depositor discipline is examined by two measures: change in the amount of deposits and interest rate. The empirical results show that depositors pay attention to bank soundness and riskiness and select banks based on the bank's condition with particular attention paid to equity ratio. It is found that depositors impose discipline on banks, but it varies according to regulatory and economic circumstances.

Keywords: Indonesia; Banks; Insurance; Deposit insurance; Market discipline; Depositor discipline (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 (search for similar items in EconPapers)
Date: 2011-03-01
New Economics Papers: this item is included in nep-ban, nep-ias and nep-sea
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Citations: View citations in EconPapers (4)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 292. 2011-03-01

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