Publication: Market Discipline Under Systemic Risk: Evidence from Bank Runs in Emerging Economies
Date
2004-11
ISSN
Published
2004-11
Author(s)
Abstract
The authors show that systemic risk
exerts a significant impact on the behavior of depositors,
sometimes overshadowing their responses to standard bank
fundamentals. Systemic risk can affect market discipline
both regardless of and through bank fundamentals. First,
worsening systemic conditions can directly threaten the
value of deposits by way of dual agency problems. Second, to
the extent that banks are exposed to systemic risk, systemic
shocks lead to a future deterioration of fundamentals not
captured by their current values. Using data from the recent
banking crises in Argentina and Uruguay, the authors show
that market discipline is indeed quite robust once systemic
risk is factored in. As systemic risk increases, the
informational content of past fundamentals declines. These
episodes also show how few systemic shocks can trigger a run
irrespective of ex-ante fundamentals. Overall, the evidence
suggests that in emerging economies, the notion of market
discipline needs to account for systemic risk.
Link to Data Set
Citation
“Levy-Yeyati, Eduardo; Martinez Peria, Maria Soledad; Schmukler, Sergio L.. 2004. Market Discipline Under Systemic Risk: Evidence from Bank Runs in Emerging Economies. Policy Research Working Paper;No.3440. © World Bank, Washington, D.C.. http://hdl.handle.net/10986/14222 License: CC BY 3.0 IGO.”
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