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William C. Gruben Jahyeong Koo Robert R. Moore

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1 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

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 Bank Interest 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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