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Roberto Steiner: Director, Economic Development Research Center, Universidad de los Andes. This paper was written while Mr. Steiner was a Visiting Scholar at the IMF Institute. We would like to thank Stanley Black, Evan Tanner, Danyang Xie, Brenda González-Hermosillo, Hugo Juan-Ramón, Liliana Rojas-Suárez, and Alejandro Gaviria for valuable discussions and comments on previous drafts, and we gratefully acknowledge input from seminar participants at Universidad de Los Andes, Fedesarrollo, the IMF Institute, the V Annual Meeting of LACEA, and the Inter-American Development Bank. Mr. Steiner acknowledges financial support from Fundación para la Promoción de la Ciencia y la Tecnología.
Or that deposit runs are only of the efficient type, they fully reflect the fundamentals of the banks (see Freixas and Rochet, 1997).
This result is particularly noteworthy if one considers that, in some countries, the establishment of an explicit deposit insurance system may constitute a reduction in the perceived coverage, to the extent that a more extensive implicit insurance had been in place previously. In fact, Gropp and Vesala (2000) find that moral hazard was reduced after explicit deposit insurance was established in the EU, since depositors had previously held expectations of a much more extensive implicit safety net.
It must be noted that the Moore (1997) study also finds the banking system in Mexico to exhibit lack of market discipline, as bank fundamentals do not explain deposit growth during the 1990s. However, the sample period is relatively small (only 16 observations) and the specification does not include many relevant systemic and macroeconomic variables (such as those used by Martínez Pería & Schmukler, 1999), so the test cannot be considered a strong finding of lack of market discipline.
Demirguc-Kunt and Detragiache (1999) express these factors as dummy variables explaining the probability of banking crises. For example, if a deposit insurance system is explicit, the respective dummy variable takes on a value of one. Since this variable is shown to be a significant predictor of financial crisis, then a country with explicit deposit insurance is more likely to exhibit moral hazard.
UPAC, or “constant purchasing power”, accounts were created in the early seventies as a means to ensure that depositors would receive a positive real return. Their yield thus incorporates an inflationary or “monetary” correction component plus a “regular” or pure interest component.
In the event that several agencies grade a financial institution, FOGAFIN will take into account the lowest grade. Financial institutions are not entitled to reimbursement if during the previous year they have received guarantee capital from FOGAFIN or special credit from the central bank.
Of course, excluding the deductible amount of 25%.
In the case of U.S. Savings and Loan institutions, the relevant market is the respective state.
They also control for individual bank size, but do not include it within the set of bank fundamental variables, since it is not considered to be directly linked to riskiness.
González-Hermosillo (1999) provides an estimation of the probability of bank failure during the 1982-1985 Colombian banking crises, much in the same manner as in the Park and Peristiani study of the U.S. savings and loan market. In particular, González-Hermosillo proposes a “bank distress” variable, the coverage ratio (the ratio of equity plus loan reserves minus non-performing loans to total assets) as a good predictor of bank failures. Both bank failures and bank distress were explained to a large extent by such bank fundamental variables as non-performing loans, the deposit-asset ratio (measuring liquidity risk), deposit and lending interest rates, and the net income-asset ratio (indicating profitability).
The trend growth rate for Colombian real GDP was 4.1 percent throughout this period. We defined periods where the growth rate was more than a full percentage point below this level (i.e., below 3.1 percent) as “bad times”. This yielded 9 of 30 observations classified as “bad times”.
We also estimated the interest rate equation (2′) but do not report it here. The results are quite mixed, with some variables performing well but others having a counterintuitive sign. As we will show, the deposit growth equation (1′) gives evidence of market discipline on the part of depositors, thus it is not necessary to conduct an additional test using equation (2′). Instead, we used an interest rate equation to determine the banks’ response to depositors’ signals, which we discuss in section V.C.
This is a common result in the country studies surveyed.
The privatization process is discussed in detail in Barajas, Steiner, and Salazar (1999), and the entry/acquisition by foreign banks is discussed in Barajas, Steiner, and Salazar (2000)
It is not surprising that significance of STATE is higher in regressions excluding non-performing loans, given the positive correlation between the two; state-owned banks exhibit consistently higher non-performing loan ratios throughout the sample period. Also, in the estimations without macro controls, the coefficient on STATE in specifications excluding non-performing loans approaches significance, with a p-value of about 11%.
The alternative interpretation would be that depositors prefer riskier banks, which is difficult to justify.
We also conducted tests on two intermediate definitions: when deposit growth is below the sector average minus two standard deviations, and when it fell below the average minus one