Market discipline in banking: evidence from Thailand during the 1997 crisis

Abstract

This article investigates the impact of banking crisis on deposit market discipline using evidence from Thailand. The empirical evidence suggests that depositors’ responsiveness to bank risk taking increases in the aftermath of the crisis. However, an explicit blanket guarantee provided by the government since the 1997 crisis weakens the extent of an increase in market discipline during the post-crisis period. The results have relevant implications on the implementation of an explicit deposit insurance scheme for Thailand.

Acknowledgements

The author is grateful to Professor Yoshinori Shimuzu and Professor Masaru Konishi for their valuable comments.

Notes

¹ The numbers in brackets indicate the number of financial institutions as of December 2004. Among the 91 finance companies that existed during the pre-crisis in 1997, only 18 companies have survived.

² Levy-Yeyati et al . (2004) suggests the importance of institutional and systemic factors in the analysis of market discipline in emerging economies.

³ The evidence that bank risk characteristics jointly affect deposit rates during the pre-crisis period, to some extent, supports the results of Opiela (2001) which provides evidence of market discipline at depository institutions in Thailand during the pre-crisis period of 1993–1997. In particular, Opiela (2001) shows that ‘differences in deposit rates between individual commercial banks and finance companies are explained by institution-specific accounting measures of risk’.

⁴ Similar to Martinez Peria and Schmukler (2001), the individual significance of certain bank risk indicators is not captured in the estimations due to high collinearity between certain bank risk indicators. In addition, the only significant and positive effect of the coefficient of bank size variable on deposit rates in the pre-crisis period and also the total period estimations is, however, not as expected and does not imply depositors’ perception of the presence of TBTF policy by the government.

⁵ This result, to some extent, supports the cross-country evidence of Demirguc-Kunt and Huizinga (2004) which shows that the existence of explicit deposit insurance undermines market discipline.