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End Of The Convoy System And The Surge Of Market Discipline: Evidence From Japanese Small Financial Institutions

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  • MURATA Keiko
  • HORI Masahiro

Abstract

This paper tests for the presence of market discipline by examining the effects of deposit-taking institutions' risk on the growth of deposits. The study analyzes a large panel of 689 small deposit-taking institutions (shinkin banks and credit cooperatives) in Japan during the period from FY 1992 to FY 2002. This study on Japanese institutions, which experienced financial crises and shifts in regulatory schemes in the 1990s, allows us to evaluate the interaction between market discipline and regulatory schemes and the impacts of the banking crises on the discipline. Our empirical findings support the effective role of market discipline by depositors. Riskier institutions attract smaller amounts of deposits. Depositor sensitivity to bank risk changed over time, complying with the historical development of regulatory schemes and the deposit insurance system. Disciplinary behavior of small-account depositors, who are fully insured, suggests that depositors are unwilling to bear certain non-pecuniary costs that accompany bank failures. Key words: governance, market discipline, deposit insurance, small financial institution JEL Classification: G21,G32

Suggested Citation

  • MURATA Keiko & HORI Masahiro, 2004. "End Of The Convoy System And The Surge Of Market Discipline: Evidence From Japanese Small Financial Institutions," ESRI Discussion paper series 105, Economic and Social Research Institute (ESRI).
    • Handle: RePEc:esj:esridp:105
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    File URL: http://www.esri.go.jp/jp/archive/e_dis/e_dis110/e_dis105a.pdf
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    References listed on IDEAS

    as
    1. Asli Demirguc-Kunt & Edward J. Kane, 2002. "Deposit Insurance Around the Globe: Where Does It Work?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 175-195, Spring.
    2. Kotaro TSURU, 2003. "Depositors' selection of banks and the deposit insurance system in Japan: Empirical evidence and its policy implications," Discussion papers 03024, Research Institute of Economy, Trade and Industry (RIETI).
    3. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174, Central Bank of Chile.
    4. Kaoru Hosono & Hiroko Iwaki & Kotaro Tsuru, 2008. "Bank Regulation and Market Discipline around the World," Gakushuin Economic Papers, Gakushuin University, Faculty of Economics, vol. 45(1), pages 27-64.
    5. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Keiko Murata & Masahiro Hori, 2006. "Do Small Depositors Exit From Bad Banks? Evidence From Small Financial Institutions In Japan," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 260-278, June.
    2. Noriko Inakura & Satoshi Shimizutani, 2010. "Deposit insurance and depositor discipline: direct evidence on bank switching behaviour in Japan," Applied Economics, Taylor & Francis Journals, vol. 42(26), pages 3401-3415.
    3. Shizuka Sekita, 2005. "Does Depositors' Discipline by Households Exist? (in Japanese)," Discussion Papers in Economics and Business 05-10, Osaka University, Graduate School of Economics.

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    More about this item

    Keywords

    governance; market discipline; deposit insurance; small financial institution jel classification: g21; g32;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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