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William C. Gruben Jahyeong Koo Robert R. Moore

Financial Liberalization, Risky Bank Lending, and Market Discipline: An Empirical Examination of Six Countries. William C. Gruben Jahyeong Koo Robert R. Moore. Federal Reserve Bank of Dallas. Approach. Consider six countries look for market discipline

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William C. Gruben Jahyeong Koo Robert R. Moore

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  1. Financial Liberalization, Risky Bank Lending, and Market Discipline: An Empirical Examination of Six Countries William C. Gruben Jahyeong Koo Robert R. Moore Federal Reserve Bank of Dallas

  2. Approach • Consider six countries • look for market discipline • look for heightened risk post-liberalization • see whether market discipline and heightened risk are related

  3. Deposit Insurance, Bank Risk, and Financial Crises: A Puzzle? • Martinez Peria and Schmukler JF 2001 • deposit insurance does not diminish market discipline • Demirgüç-Kunt and Detragiache JME 2002 • deposit insurance increases the likelihood of financial crises • Barth, Caprio, and Levine 2001 • regulatory restrictions make financial crises more likely

  4. Financial Crises and Financial Institution Risk • Sources of financial crises • force majeure • heightened risk taking by financial institutions • When will financial institutions take on heightened risk?

  5. Market Discipline • Deposit flows and bank characteristics • Behavior in wake of shocks

  6. Deposit Growth and Bank Characteristics Constant term not shown

  7. Risk Taking • Ex post problems? • Aggressive growth strategy/market share struggle • increased quantity • change in focus • Liberalization/privatization

  8. Bank Interest Rates: Argentina

  9. Bank Interest Rates: Canada

  10. BankInterest Rates: Mexico

  11. Bank Interest Rates: Norway

  12. Bank Interest Rates: Singapore

  13. Interest Rates: Texas S&L

  14. Measuring Preemptive Investment • Shaffer 1993 • Perceived MR • MRp=P + λh(Q, Y, α) • λ=0 perfect competition • λ>0 market power & underproduction • λ<0 “supercompetition” and overproduction

  15. Estimation • Q = α0 + α1P + α2Y + α 3 PZ + α 4 Z + α 5 PY +α 6YZ + ε • P = -λQ/(α1 +α3 Z + α5Y) + (C/Q)(ß1 + ß2 ln Q + ß3 ln W1 + ß4 ln W2) + ξ • P = -λQ/(α1 +α3 Z + α5 Y) + (C/Q)(ß1 + ß2 ln Q + ß3 ln W1 + ß4 ln W2)- ß5 DQ/(α1 +α3 Z + α5Y) + ξ

  16. Estimation Results for Bank Risk Model

  17. Depositor Discipline Limits Risk-Taking After Liberalization

  18. Conclusion • Financial liberalization need not increase risk • Market discipline constrains risk taking • Financial liberalization need not precipitate financial crises

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