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REGULATORY FORBEARANCE AND DEPOSITOR MARKET DISCIPLINE: EVIDENCE FROM SAVINGS BANKS IN KOREA

Authors

  • HYOSOON CHOI,

    1. Choi: Korea Deposit Insurance Corporation, Seoul 100-180, Korea. Phone 82-2-758-0004, Fax 82-2-758-0010, E-mail hschoi@kdic.or.kr
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  • WOOK SOHN

    1. Sohn: KDI School of Public Policy and Management, Seoul 130-868, Korea. Phone 82-2-3299-1062, Fax 82-2-3299-1129, E-mail wooksohn@kdischool.ac.kr
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    • We are grateful to two anonymous referees and participants at the 2012 Western Economic Association International, 2012 International Conference on Asia-Pacific Financial Markets, and 2009 Financial Management Association meetings for their helpful comments and suggestions. We also thank the KDI School of Public Policy and Management for providing financial support.


Abstract

This paper investigates whether regulatory forbearance for savings banks in Korea affects the market discipline of depositors using data from 2000 to 2010, which are characterized by a series of exits of savings banks. We find that depositors' sensitivity to the savings banks' asset quality decreases when there is regulatory forbearance for failing savings banks. This forbearance effect is also observed in the behavior of the depositors of the neighboring savings banks in the same business area. These results suggest that regulatory forbearance may cause depositors to misjudge bank risks, increasing the expected costs of bank failure. (JEL G21, G28)

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