When does financial liberalization make banks risky? an empirical examination of Argentina, Canada and Mexico

William Gruben, Jahyeong Koo and Robert Moore

No 9905, Working Papers from Federal Reserve Bank of Dallas

Abstract: In the literature on systemic banking crises, two common themes are: (1) lack of market discipline encourages risky lending and (2) financial liberalization or privatization lead to risky lending. However, there is evidence to suggest that neither financial liberalization nor weak market discipline always precedes risky lending. We test for depositor discipline and, separately for post-liberalization or post-privatization risky lending in Argentina, Canada, and Mexico. In the countries without market discipline, lending risk increases significantly in the wake of liberalization. Where depositors discipline banks, banks neither behave riskily nor does their risk increase in the wake of privatization.

Pages: 26 pages
Date: 1999-07-01
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (7)

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