Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic

28 Pages Posted: 22 Jan 2002

See all articles by Jan Hanousek

Jan Hanousek

Faculty of Business and Economics, Mendel University in Brno; Centre for Economic Policy Research (CEPR)

Gérard Roland

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.

Keywords: Bank failures, bank supervision, Czech banking crisis, default risk, transitional economies

JEL Classification: C53, E58, G21, G33

Suggested Citation

Hanousek, Jan and Roland, Gérard, Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic (January 2002). Available at SSRN: https://ssrn.com/abstract=297937

Jan Hanousek (Contact Author)

Faculty of Business and Economics, Mendel University in Brno ( email )

Brno
Czech Republic

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gérard Roland

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4321 (Phone)
510-642-6615 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
25
Abstract Views
1,688
PlumX Metrics