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How depositors discipline banks: the case of Russia

Vol. 2. M.: EERC, 2007.

This paper investigates whether market discipline exists in the Russian personal deposit market, i.e. whether depositors react to changes in fundamentals, characterizing banks' additional risk-taking by requiring higher interest rates, withdrawing their deposits or switching from long-term to short-term or on-call deposits. Another aim is to test whether depositor discipline differs for different groups of banks (state, private, foreign) and whether it disappears with banks' admission to deposit insurance system. I use panel bank-specific data over the period April 2004 – July 2006. The analysis reveals that the depositors of foreign banks exert virtually no discipline either by quantity of by price. The depositors of state banks use quantity-based discipline mechanism, but the only significant characteristic is bank's size. The maturity shifts exist for time deposits but the deposit insurance system introduction reduced them significantly. The depositors of private domestic banks discipline their banks by quantity (choosing larger bank in terms of assets), by price and by switching from on-call to long-term deposits. Admittance to the deposit insurance system introduction did not remove this discipline moreover disciplining became even more explicit.

How depositors discipline banks: the case of Russia