Depositors’ Discipline in Uruguayan Banks

This paper uses panel data of Uruguayan private owned banks to investigate the depositors’ reaction to changes in banks’ fundamentals in three sub-periods: pre-crisis (from January 2000 to December 2001); crisis (January 2002 to July 2002); and post-crisis (August 2002 to December 2004). We test for depositors’ discipline through the growth of deposits and through changes in the interest rates. We extend the analysis by testing if depositors discipline banks by shortening the maturity of time deposits. Taking into account that depositors’ discipline does not only involve depositors’ reaction but also the subsequent bank’s response, we also look into the significance and velocity of mean reversion in the deposits’ interest rates. We find strong evidence that supports the hypothesis that depositors discipline riskier banks by withdrawing their deposits and weaker evidence on the hypothesis that depositors require higher interest rates and reduce the maturity of their deposits as disciplining actions. Additionally, we find that banks react to depositors’ actions -depositors’ discipline is effective- specifically in the post-crisis period.