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

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TLDR
In this paper, the authors examined the behaviour of bank depositors in India and found no significant evidence of discipline being exerted by the bank customers by using market forces as a disciplinary mechanism in cases of underdeveloped financial systems.
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.

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TL;DR: In this article, the authors empirically verified the hypothesis of market discipline in the Central American banking system using the generalized method of moments (SYS GMM estimator) and a sample of 30 banks from six Central American countries during the 2008-2012 period.
References
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Journal ArticleDOI

Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.

TL;DR: In this article, the generalized method of moments (GMM) estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
Journal ArticleDOI

Law, endowments, and finance

TL;DR: In this paper, two theories regarding the historical determinants of financial development are assessed using a sample of 70 former colonies, and the empirical results provide evidence for both theories. But, initial endowments explain more of the cross-country variation in financial intermediary and stock market development.
Journal ArticleDOI

Market discipline, disclosure and moral hazard in banking

TL;DR: In this article, the effectiveness of market discipline in limiting excessive risk-taking by banks is investigated using a large cross-country panel data set consisting of observations on 729 individual banks from 32 different countries over the years 1993 to 2000.
Journal ArticleDOI

The Pricing of Interest‐Rate Risk: Evidence from the Stock Market

TL;DR: In this article, a two-factor APT model with the market and changes in the yield on long-term government bonds as factors is employed to evaluate whether firms are required to pay an ex ante premium to investors for bearing the risk of interest-rate changes.
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