L. M. Bhole

Bio: L. M. Bhole is an academic researcher from Indian Institute of Technology Bombay. The author has contributed to research in topics: Interest rate & Financial market. The author has an hindex of 1, co-authored 1 publications receiving 3 citations.

'Bank Depositors' Role as a Disciplinary Force in Indian Banking: a Dynamic Panel Approach

Abstract: The New Basel Capital Accord recognises that market discipline (Pillar III) has the potential to reinforce minimum capital standards (Pillar I) and the supervisory review process (Pillar II), and so promote safety and soundness in banks and financial systems. A number of studies in the context of developed financial system find support for this complementary relationship. However, one important question that can be raised in this context is the extent to which market can be relied upon to act as an effective disciplinary force in the immature financial markets dotting the developing economies, including India. This paper addresses this issue by examining the behaviour of the bank depositors in India. More specifically, it attempts to ascertain whether depositors respond to changes in bank fundamentals, both in terms of deposit held with a bank as well as interest received on it. Considering that a bank's ability to change interest rates (in addition to bank fundamentals) may also influence depositors' willingness to hold deposit with the concerned bank, a possibility arises that depositors' reaction and banks' response (in terms of interest rate payable on deposits) may be a jointly determined process. To account for this dynamic process, the Arellano-Bond dynamic panel generalised methods of moments (GMM) estimation method is employed. The results fail to find any significant evidence of discipline being exerted by the bank depositors. This highlights the limitations of relying on market forces as a disciplinary mechanism in cases of underdeveloped financial systems and the necessity to maintain a high capital standard as well as a vigilant and strong supervisory process.

Market Discipline and Deposit Insurance: Evidence from Some Middle Eastern Banks

Abstract: Financial development, which involves the establishment and expansion of institutions, instruments and markets, plays an important role in economic growth given that they can ameliorate information and transaction costs, facilitate a more efficient mobilization of savings, spread risk and provide liquidity. Moreover, given the high costs of banking crises, regulators always seek the means that promote greater levels of prudence in banks’ behavior. Indeed, this can be done by relying on certain regulatory actions (supervision and regulations) and on market discipline. In turn, market discipline relies on private sector agents (equity holders and debt holders) to produce information that assists bank supervisors in recognizing potential banking problems and in implementing remedial measures. The primary objective of this research is to provide answers to two questions. First, do depositors discipline Jordanian, Kuwaiti, Omani, and Saudi banks? Second, does the deposit insurance design have any bearing on market discipline – given the fact that Kuwaiti and Saudi deposits are 100 percent insured explicitly and implicitly respectively, while Jordanian and Omani deposits are insured up to $14,000 and $50,000 respectively.Based on a sample of listed Jordanian, Kuwaiti, Omani, and Saudi banks during the time period 1997 – 2006, the overall results clearly indicate the absence of market discipline in Kuwait, Oman, and Saudi Arabia. In other words, market discipline is at work only in Jordan.