Journal of Finance and Bank Management

Depositor Discipline and Bank Risk-Taking Behavior: Evidence from the South-East Asian Financial Crises
Mohammed Ershad Hussain, M Kabir Hassan, Mahfuzul Haque

Abstract
We find evidence that depositors do not monitor banks strictly (weak state of depositor discipline) when their deposits are guaranteed by the government either explicitly or implicitly. Therefore, we find evidence in support of “the moral hazard of depositos due to government deposit guarante”. The Grubn et al ( 1999 and 2003) framework and the H-statistics both present evidence that monopolistic competition prevalied in the banking sectors in the countries of our study. We also test if there was an approach towards risk taking before and after the crisis of 1997, but we no find evidence to support such behaviour. Therefore, we do not find evidence in support of “the moral hazard of bank managers and owners due to government guarantee” and also no evidence of any link between depositor discipline and bank’s risk taking.

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