The resolution of banking crises and market discipline: international evidence

Abstract

This paper analyzes the effect of banking crises on market discipline in a sample of 101 banking crises over the 1989-2007 period. We control for unobservable bank, country, and time specific effects using an international panel data set of 3,254 banks from 87 countries. We also evaluate how bank regulation, supervision, institutions, and crisis management policies shape the effect of banking crises on market discipline. Our results suggest that on average market discipline diminishes after a banking crisis. The reduction of market discipline is, moreover, higher in countries where bank regulation, supervision, and institutions promote market discipline before the banking crisis, and where a more accommodating kind of intervention is used. Specifically, forbearance and recapitalizations are the two kinds of interventions that have the most negative effect on market discipline.