Financial liberalization, market discipline and bank risk

William Gruben, Jahyeong Koo and Robert Moore

No 303, Center for Latin America Working Papers from Federal Reserve Bank of Dallas

Abstract: In the literature on systemic banking crises, two common themes are: (1) Risky lending often follows bank liberalization. (2) Lack of market discipline encourages risky lending. That not all liberalizations are followed by financial crisis and that financial systems without market discipline sometimes operate without incident invites examination of these themes. In a test of six countries, we find that our measure of bank risk increases significantly in the wake of financial liberalizations, but only where depositors fail to discipline banks. Our measures of market discipline and bank risk, however, are persistently inversely related

Date: 2003
New Economics Papers: this item is included in nep-fin and nep-ifn
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