Does the market discipline banks? Evidence from Balkan states
The Journal of Risk Finance
; 23(4):418-436, 2022.
Article
in English
| ProQuest Central | ID: covidwho-1948694
ABSTRACT
Purpose>This research is designed to investigate the presence of market discipline in the banking sector, across Balkan states in Europe. Specifically, the effects of CAMEL variables on the cost of funds and deposit-switching have been assessed.Design/methodology/approach>The CAMEL method of bank evaluation has been applied as well as two measures for market discipline (costs of funds and deposit-switching behaviour). Data have been obtained for 10 Balkan states for the 2006–2019 period. For data analysis, ordinary least squares (OLS) and fixed effects models have been utilized. The generalized method of moments (GMM) method has been deployed as well as a dynamic panel model.Findings>Evidence of market discipline has been found, in the form of a higher cost of funds in the context of capital adequacy (but not for other CAMEL variables). Evidence of market discipline in the form of deposit-switching, however, has not been found. In addition, it has been discovered that bank size and gross domestic product (GDP) growth lower the costs of funds for banks.Originality/value>In the wake of the pandemic, banks need to prepare themselves for very difficult situations and relevant studies can provide help. Therefore, this research has contributed to the developing literature on this topic. In addition, the findings have important practical implications. Results show that banks should maintain adequate levels of capital if they want to control their costs of funds. Results also show that market discipline, in the form of higher costs of funds, can be imposed on banks to discourage excessive risk-taking. Findings highlight the value of appropriate policies and strong supervision of the financial industry. Findings also underline the importance of offering financial incentives to banks. For example, if banks know they will be able to avoid higher costs of funds by controlling their risk levels, they will avoid unrestrained risk-taking.
Business And Economics--Banking And Finance; CAMEL; Market discipline; Deposit switching; Cost of funds; Risk management; Basel II; Regulation; Banking industry; Economic crisis; International finance; Ratings & rankings; Bank failures; Uninsured people; Coronaviruses; Credit risk; Pandemics; Medical research; COVID-19; Balkan states
Full text:
Available
Collection:
Databases of international organizations
Database:
ProQuest Central
Type of study:
Experimental Studies
/
Prognostic study
Language:
English
Journal:
The Journal of Risk Finance
Year:
2022
Document Type:
Article
Similar
MEDLINE
...
LILACS
LIS