Cross-Country Studies on the Effectiveness of Market Discipline to Banks

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This study is composed of three parts.In Part I, I conduct theoretical analyses on what conditions depositors select banks and how depositors' selection of banks affects bank managers' risk-taking behavior. I stress that bailout policy nullifies market discipline and promotes bank managers' risk taking behavior.In Part II, I study Japanese depositors' behavior during the 1994s and find that depositors selected banks according to bank risk both in terms of deposit growth rates and deposit interest rates. The correlation of the growth rates of time deposits and bank risk increased just before the coverage limit was reintroduced in 2002.In Part III, following surveys on the existing country studies, I present cross-country analyses conducted with Hiroko Iwaki and Tsuru Kotaro. We constructed 18,000 bank-year data across 63 countries and bank regulation data. Using this data set, we find that depositors' risk sensitivity increases as bank regulation and rule of law are weak and financial system is less developed. This result is consistent with the "representative hypothesis," positing that regulatory bodies supervise banks as a representative of depositors.