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Kathleen McDill and Andrea M. Maechler
This paper investigates the presence of depositor discipline in the U.S. banking sector. We test whether depositors penalize (discipline) banks for poor performance by withdrawing their uninsured deposits. While focusing on the movements in uninsured deposits, we also account for the possibility that banks may be forced to pay a risk premium in the form of higher interest rates to induce depositors not to withdraw their uninsured deposits. Our results support the existence of depositor discipline: a weak bank may not necessarily be able to stop a deposit drain by raising its uninsured deposit interest rates.
Kathleen McDill and Andrea M. Maechler

In the banking sector, one form of market discipline is depositor discipline—the ability of depositors to penalize (discipline) banks for poor performance by withdrawing deposits. Investors in bank liabilities, such as uninsured deposits or subordinated debt, actively reward or punish banks for their relative performance. In the case of excessive risk taking, depositors can demand higher yields on their liabilities or withdraw their funds. By making risk taking more costly for banks, depositor discipline should curb banks’ incentives to take excessive risk and

Mr. George G. Kaufman and Mr. Steven A. Seelig

losses and delays in payment could reduce depositor discipline on solvent banks, thereby increasing their banks’ fragility and the probability of failure. Thus, either corner solution appears to have drawbacks as well as advantages and an intermediate interior solution in terms of delay time in paying depositors may be preferred in reducing the potential damage from bank failures and maximizing aggregate economic welfare. The paper models the tradeoffs between increased market discipline and increased probability of government bailout as the time delay by the insurance

Mr. George G. Kaufman and Mr. Steven A. Seelig
Losses may accrue to depositors at insolvent banks both at and after the time of official resolution. Losses at resolution occur because of poor closure rules and regulatory forbearance. Losses after resolution occur if depositors' access to their claims is delayed or "frozen." While the sources and implications of losses at resolution have been analyzed previously, the sources and implications of losses after resolution have received little attention. This paper examines the causes of delayed depositors' access to their funds at resolved banks, describes how the FDIC provides immediate access, reports on a special survey of access practices in other countries, and analyzes the costs and benefits of delayed access in terms of both the effects on market discipline and depositor pressure to protect all deposits.
International Monetary Fund. External Relations Dept.

Otker-Robe 03/224: “What Sustains Fiscal Consolidations in Emerging Market Countries?” Sanjeev Gupta, Emanuele Baldacci, Benedict J. Clements, and Erwin R. Tiongson 03/225: “Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt,” Thomas Cosimano and Michael T. Gapen 03/226: “Dynamic Depositor Discipline in U.S. Banks,” Andrea Maechler and Kathleen M. McDill 03/227: “How Useful Are Benefit Incidence Analyses of Public Education and Health Spending?” Hamid R. Davoodi, Erwin H. Tiongson, and Sawitree S. Asawanuchit 03/228: “Why Does FDI Go Where It


institution being sold. In the past, at least, our resolutions have protected virtually all depositors and other general creditors. As a consequence, there is a view that this means of resolution provides no constraint on bank risk taking other than that provided by the regulatory or supervisory process at the agency. Several possibilities for instilling discipline are being discussed. One is by forcing “depositor discipline.” For example, the present deposit insurance coverage—which has a ceiling of $100,000 per bank per depositor—could be reduced to $50,000. Another

Mr. Adolfo Barajas and Mr. Mario Catalan

the deposit runs in Argentina in 1995 and finds that banks with weaker fundamentals suffered larger deposit withdrawals. Levy-Yeyati et. al. (2010) examine depositor behavior in Argentina in the run-up to the 2001 crisis and find that depositor discipline remains significant once macroeconomic factors are accounted for. 6 Barajas at. al. (2007) also study the 2001 Argentine crisis, and find that depositors favored banks with higher loan quality and lower exposure to the government. Some studies focus on market discipline in a cross-country setting. Demirguc