Essays on market discipline in emerging markets

Abstract

In the aftermath of major crises, most emerging markets improved their banking industries according to Basel-II requirements, which emphasize the role of market discipline, supervision and capital adequacy in controlling risk-taking by banks. After the 1998 crisis in the Russian Federation and the 2001 crisis in Turkey, Central Bank of Russia and Banking Regulation and Supervision Agency of Turkey restructured and consolidated the banking industries in both of the countries. In the restructured banking environment, market discipline could be used as a complementary mechanism for improved supervision of banking systems. First two essays of this thesis elaborate on depositor discipline in the Russian Federation and Turkey. Findings provide evidence that in the Russian Federation, depositors allocate funds in well-capitalized and liquid banks. Similarly after the crisis, depositors in Turkey prefer well-capitalized banks that have favorable asset quality. Although banks in Turkey operate more efficiently, due to excessive guarantees, depositors do not monitor banks’ risk taking behavior particularly before restructuring. In the third essay, the role of different types of shareholders in disciplining listed banks in Turkey is studied. While diversified shareholders are interested in profitability, owner-managers are concerned with capital adequacy, liquidity and efficiency of the banks. In addition, owner-managers are found to have some influence on bank management to reduce risk-taking. In particular, small banks take measures to increase the capital ratio while decreasing non-performing loans as a result of an increase in shareholders’ asset risk assessments.