Market Discipline, Capital Adequacy and Bank Behaviour: Theory and Indian Evidence

Saibal Ghosh and Abhiman Das

MPRA Paper from University Library of Munich, Germany

Abstract: Policy debate with regard to financial intermediaries has focused on whether, and to what extent, governments should impose capital adequacy requirements on banks, or alternately, whether market forces could also ensure the stability of banking systems. The paper contributes to this debate by showing how market forces may motivate banks to select high capital adequacy ratios as a means of lowering their borrowing costs. If the effect of competition among banks is strong, then it may overcome the tendency for bank capitalisation that arises from systemic effects. If systemic effects are strong, regulation is required. Empirical tests for the Indian public sector banks during the 1990s demonstrate that better capitalised banks experienced lower borrowing costs. These findings suggest that ongoing reform efforts at the international level should primarily focus on increasing transparency and strengthening competition among banks.

Keywords: market disciplinel capital adequacy; deposit insurance; banking; India (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2005-03
View list of references

Published in Economic and Political Weekly 12.40(2005): pp. 1198-1209

Downloads: (external link)
http://mpra.ub.uni-muenchen.de/17398/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:17398

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany
Address: Schackstr. 4, D-80539 Munich, Germany
Contact information at EDIRC.
Series data maintained by Ekkehart Schlicht ().