Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico

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Abstract
The authors examine the banking industries of Argentina, Chile, and Mexico to see if market discipline existed there in the 1980s and 1990s. Using a set of bank panel data, they test for the presence of market discipline by studying whether depositors punish risky banks by withdrawing their deposits. They find that across countries and across deposit insurance schemes, market discipline exists even among small insured depositors - who punish risky banks by withdrawing their deposits. Standardized coefficients and variance decomposition of deposits indicate that bank fundamentals are at least as important as other factors affecting deposits. Generalized Method of Moments estimates confirm that the results are robust to the potential endogeneity of bank fundamentals.
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