Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic

Gérard Roland and Jan Hanousek

No 3122, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks’ equity positions are often low.

Keywords: Default risk; Bank failures; Bank supervision; Transitional economies; Czech banking crisis (search for similar items in EconPapers)
JEL-codes: C53 E58 G21 G33 (search for similar items in EconPapers)
Date: 2002-01
New Economics Papers: this item is included in nep-cfn and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech republic (2002)
Working Paper: Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic (2001)
Working Paper: Banking Passivity And Regulatory Failure In Emerging Markets: Theory And Evidence From The Czech Republic (2001)
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