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Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic

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  • Jan Hanousek
  • Gerard Roland

Abstract

We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.

Suggested Citation

  • Jan Hanousek & Gerard Roland, 2001. "Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic," CERGE-EI Working Papers wp192, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp192
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    Cited by:

    1. Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," William Davidson Institute Working Papers Series wp829, William Davidson Institute at the University of Michigan.
    2. Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," Middlebury College Working Paper Series 0607, Middlebury College, Department of Economics.
    3. repec:zbw:bofitp:2006_013 is not listed on IDEAS
    4. Gandjar Mustika & Enny Suryatinc & Maximilian Hall & Richard Simper, 2015. "Did Bank Indonesia cause the credit crunch of 2006–2008?," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 269-298, February.
    5. Kraft, Evan & Galac, Tomislav, 2007. "Deposit interest rates, asset risk and bank failure in Croatia," Journal of Financial Stability, Elsevier, vol. 2(4), pages 312-336, March.
    6. Sándor Gardó, 2010. "Bank Governance and Financial Stability in CESEE: A Review of the Literature," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 6-31.
    7. repec:onb:oenbwp:y:2010:i:1:b:1 is not listed on IDEAS
    8. Karel Janda, 2011. "Credit Guarantees and Subsidies when Lender has a Market Power," Working Papers IES 2011/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
    9. Anca Podpiera & Jiri Podpiera, 2005. "Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure," Working Papers 2005/06, Czech National Bank.

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    More about this item

    Keywords

    bank failures; bank supervision; Czech banking crisis; default risk; transitional economies;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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