Private Sector Incentives and Bank Risk Taking: A Test of Market Discipline Hypothesis in Deposit Money Banks in Nigeria
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Date
2013-06
Authors
Chibundu, Ezema Charles
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
We use panel data of deposit money banks in Nigeria to investigate depositors’ reaction
to changes in bank risks as proxied by their fundamentals. We are concerned with two
questions that are relevant to the design of a new regulatory framework for the Nigerian
banking industry: 1) whether depositors respond to bank risk as standard theories predict; and 2) if they do, are such responses strong enough to discipline deposit money banks
for excessive risk taking? Using a two-stage framework (monitoring and influence), and
a two-channel approach (quantity channel and price channel), our results suggest that
deposit growth is sensitive to bank risks. However, the interest rate channel of depositor
discipline is not as clear. Only inter-bank deposit interest rate is shown to respond to bank
fundamentals. Both total deposit interest rate and time deposit rates are less sensitive to
bank fundamentals. Furthermore, there is no evidence that banks do, in fact, respond to
signals sent by depositors as suggested by market discipline hypothesis as only interbank
interest rates show evidence of mean reversion.
Description
HG 1660. N 5 C 48 2013
Keywords
Deposit Banking - Nigeria , Risk - Nigeria , Deposit Banking