Financial contagion and depositor monitoring

Augusto Hasman (), Margarita Samartín and Jos Van Bommel

Journal of Banking & Finance, 2013, vol. 37, issue 8, 3076-3084

Abstract: This paper analyzes market discipline in a many-bank economy where contagion and bank runs interact. We present a model with differently-informed depositors, where those depositors that are more informed have incentives to monitor banks’ investments. It is shown that when banks are undercapitalized, and the probability of success of the risky asset is low, depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment.The results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline.

Keywords: Bank runs; Capital requirements; Contagion; Deposit insurance; Information; Market discipline (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:8:p:3076-3084

DOI: 10.1016/j.jbankfin.2013.02.037

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