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Oxford Economic Papers Advance Access published online on April 13, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp006
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© Oxford University Press 2009 All rights reserved

How do Russian depositors discipline their banks? Evidence of a backward bending deposit supply function

Alexei Karas*, William Pyle{dagger}, and Koen Schoors{ddagger}

*Roosevelt Academy Middelburg, The Netherlands and CERISE, Ghent University, Belgium; e-mail: a.karas{at}roac.nl
{dagger}Economics Department, Middlebury College, Middlebury, VT 05753, USA, and William Davidson Institute, University of Michigan Business School; e-mail: wpyle{at}middlebury.edu
{ddagger}CERISE, Ghent University, Tweekerkenstraat 2, 9000 Ghent, Belgium, and William Davidson Institute, University of Michigan Business School; e-mail: koen.schoors{at}ugent.be

JEL classifications: G21, O16, P2


  Abstract

Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households. Evidence for the standard form of price discipline, however, is weak. This combination of findings is unusual within the context of the literature on market discipline. But it is consistent with depositors interpreting the deposit rate as a complementary proxy of otherwise unobserved bank-level risk. Testing this hypothesis, we estimate the deposit supply function and show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction.


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