Working Paper

Market discipline by depositors: evidence from reduced form equations

Abstract: This paper examines the effects of the estimated probability of bank failure on the growth rates of large time deposits and interest rates on those deposits. While riskier banks paid higher interest rates, they attracted less large time deposits in the second half of the 1980s. These results indicate that risky banks faced unfavorable supply schedules of large time deposits and, hence, support the presence of market discipline by large time depositors. The empirical analysis also considers the effects of bank size, but fails to find evidence that depositors preferred large banks.

Keywords: Deposit insurance;

Status: Published in Quarterly Review of Economics & Finance, 1995 special issue

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1994

Number: 1994-023