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Sophisticated Discipline in a Nascent Deposit Market: Evidence from Post-Communist Russia

Alexei Karas, W. Pyle and Koen Schoors

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households. Evidence for the standard form of price discipline, however, is weak. This combination of findings is unusual within the context of the literature on market discipline. But it is consistent with depositors interpreting the deposit rate as a complementary proxy of otherwise unobserved bank-level risk. Testing this hypothesis, we estimate the deposit supply function and show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction.

Keywords: market discipline; deposit market; Russia (search for similar items in EconPapers)
JEL-codes: G21 O16 P2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-tra
Date: 2007-01
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