Depositor Discipline in the East Asian Banking System

Abstract

This paper analyses the effectiveness of depositor discipline in the East Asian banking system during the time surrounding the 1997 crisis period. Firstly, the paper investigates the 'wake-up call' hypothesis, to find out whether depositor responses are higher during the post-crisis period. Secondly, the paper analyses the possible non-linear relationship between price elasticity and bank quality by separately analysing depositors' reaction to the price offered by both weak and healthy banks. Thirdly, this paper analyses the weakening effect of the depositor protection scheme. Analyses were carried out on a total of 193 banks in the East Asian banking system during the period from 1995 to 2005. The findings confirm that depositors do discipline banks and provide support for the 'wake-up call' hypotheses. The analysis, which was done by subdividing the sample of banks based on their quality, shows that depositors did not discipline weaker banks by demanding higher premiums. The findings also confirm the weakening effect of the depositor protection schemes.