Testing for Market Discipline in the Brazilian Banking Industry

31 Pages Posted: 21 Jun 2007

Date Written: June 2007

Abstract

This paper investigates the effectiveness of depositor discipline for the Brazilian banking industry. The study shows that depositors are able do discriminate between well and poorly managed banks. Evidence of market discipline is found, both via quantity (withdrawal of deposits) and prices (increases in interest rates). However, the former is more pronounced in crisis periods while the latter is more relevant in tranquil periods. Therefore, in crisis depositors discipline banks by withdrawing deposits while in non-crisis periods charging higher interest rates. The macroeconomic environment and systemic effects are shown to be important. Furthermore, the too big to fail hypothesis is also confirmed for the Brazilian economy.

Keywords: market discipline,banking system, BASEL accord

JEL Classification: G21, G28

Suggested Citation

Romera, Marcia P. and Tabak, Benjamin M., Testing for Market Discipline in the Brazilian Banking Industry (June 2007). Available at SSRN: https://ssrn.com/abstract=995189 or http://dx.doi.org/10.2139/ssrn.995189

Marcia P. Romera (Contact Author)

Ministry of Finance, Brazil ( email )

Brasília, Distrito Federal
Brazil

Benjamin M. Tabak

FGV/EPPG ( email )

SGAN Av. L2 Norte - Quadra 602 - Módulos A, B e C
Brasília, Rio de Janeiro 70830-051
Brazil

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