Bank risk, charter value and depositor discipline: a simultaneous equations approach

Abstract

Using data on listed Indian banks for 1996–2006, the article finds that charter value, depositor discipline and bank risk-taking are intertwined, with each tending to reinforce the other. Whereas charter value is found to be a nonlinear determinant of market discipline, the latter is found to positively impact charter value. Additionally, higher risk-taking is found to exert a weakening effect on market discipline.

Notes

¹Agusman et al. (2006) refers to charter value as ‘self-discipline’ in their paper.

²CAMEL is the acronym for Capital adequacy, Asset quality, Management, Earnings and Liquidity and is typically employed by bank supervisors for on-site inspection and ratings of banks.

³NSE is the state-of-the-art exchange for listed companies in India. The capital market (equities) segment commenced operations in November 1994.

⁴Agusman et al. (2006) report a positive relation between charter value and bank risk for most (but not all) measures of bank risk.

⁵The inflection point is calculated as the derivative of market discipline with respect to charter value.