Bank Regulation and Market Discipline around the World

Kaoru Hosono, Hiroko Iwaki and Kotaro Tsuru

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper investigates the effectiveness of depositor discipline and its relationship with various bank regulations and supervisions using a panel of about 17,000 bank-year data during 1992-2002 around 60 countries. We first theoretically show that deposit interest rate and its sensitivity to bank risk depend on the bank insolvency risk and the fraction of deposit protection, among others. Then we find evidence that strict regulations on bank activities and powerful supervisory authorities tend to reduce deposit interest rate and its sensitivity to bank risk. We interpret our results as suggesting that strict regulations on bank activities are likely to be associated with generous bailout of an insolvent bank, resulting in weak market discipline and a fragile banking system.

Pages: 72 pages
Date: 2004-10
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Citations: View citations in EconPapers (14)

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Journal Article: Bank Regulation and Market Discipline around the World (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:04031

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