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Financial contagion and depositor monitoring

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  • Hasman, Augusto
  • Samartín, Margarita
  • Bommel, Jos Van

Abstract

This paper analyzes market discipline in a many-bank economy where contagion and bank runs interact. We present a model with differently-informed depositors, where those depositors that are more informed have incentives to monitor banks’ investments. It is shown that when banks are undercapitalized, and the probability of success of the risky asset is low, depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment.The results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline.

Suggested Citation

  • Hasman, Augusto & Samartín, Margarita & Bommel, Jos Van, 2013. "Financial contagion and depositor monitoring," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3076-3084.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:3076-3084
    DOI: 10.1016/j.jbankfin.2013.02.037
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    References listed on IDEAS

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    Cited by:

    1. Jin Cheng & Meixing Dai & Frédéric Dufourt, 2015. "The banking crisis with interbank market freeze," Working Papers of BETA 2015-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    2. Atmaca, Sümeyra & Schoors, Koen & Verschelde, Marijn, 2020. "Bank loyalty, social networks and crisis," Journal of Banking & Finance, Elsevier, vol. 112(C).
    3. Hasman, Augusto & López, Ángel L. & SamartIín, Margarita, 2011. "Government, taxes and banking crises," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2761-2770, October.
    4. García-Palacios, Jaime H. & Hasman, Augusto & Samartín, Margarita, 2014. "Banking crises and government intervention," Journal of Financial Stability, Elsevier, vol. 15(C), pages 32-42.

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    More about this item

    Keywords

    Bank runs; Capital requirements; Contagion; Deposit insurance; Information; Market discipline;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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