Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/127995
Authors: 
Blum, Jürg
Year of Publication: 
2000
Series/Report no.: 
Working Paper, Study Center Gerzensee 00.08
Abstract: 
This paper analyzes the influence of market discipline on the risk-taking incentives of banks. It is shown that market discipline reduces risk if banks can credibly commit to a given level of risk before the interest rate on deposits is set. If, however, the bank can readjust the level of risk after the deposit rate is contracted, market discipline leads to an increase in risk. The reason is that rational depositors anticipate the banks' behavior and therefore ask for a higher risk premium ex ante. Facing a higher interest burden, the banks in turn have an even greater incentive to increase risk becouse the option to go bankrupt is more valuable.
Subjects: 
Market discipline
banks
risk taking
deposit insurance
JEL: 
G21
G28
Document Type: 
Working Paper

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