Market Discipline to Banks in Indonesia, the Republic of Korea, Malaysia and Thailand

This paper analyzes the effectiveness of market discipline for banks on the basis of an ADBI survey on bank-specific information, which was interpreted by country-specific institutional factors such as disclosure and deposit protection.

Empirical evidence shows that the deposit interest rate is negatively correlated with bank equity capital (particularly for Indonesia and Korea) and this correlation is closer before the financial crisis of the late 1990s. This suggests that depositors understand bank risk and can identify a problem bank.

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