Market discipline under systemic risk - evidence from bank runs in emerging economies

Eduardo Levy-Yeyati, Maria Martinez Peria and Sergio Schmukler
Authors registered in the RePEc Author Service: Eduardo Levy Yeyati

No 3440, Policy Research Working Paper Series from The World Bank

Abstract: The authors show that systemic risk exerts a significant impact on the behavior of depositors, sometimes overshadowing their responses to standard bank fundamentals. Systemic risk can affect market discipline both regardless of and through bank fundamentals. First, worsening systemic conditions can directly threaten the value of deposits by way of dual agency problems. Second, to the extent that banks are exposed to systemic risk, systemic shocks lead to a future deterioration of fundamentals not captured by their current values. Using data from the recent banking crises in Argentina and Uruguay, the authors show that market discipline is indeed quite robust once systemic risk is factored in. As systemic risk increases, the informational content of past fundamentals declines. These episodes also show how few systemic shocks can trigger a run irrespective of ex-ante fundamentals. Overall, the evidence suggests that in emerging economies, the notion of market discipline needs to account for systemic risk.

Keywords: Payment Systems&Infrastructure; Financial Intermediation; Financial Crisis Management&Restructuring; Banks&Banking Reform; Labor Policies; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation; Environmental Economics&Policies (search for similar items in EconPapers)
Date: 2004-11-01
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies (2004)
Working Paper: Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies (2004)
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