Bank risk, charter value and depositor discipline: a simultaneous equations approach

Abstract

Using data on listed Indian banks for 1996–2006, the article finds that charter value, depositor discipline and bank risk-taking are intertwined, with each tending to reinforce the other. Whereas charter value is found to be a nonlinear determinant of market discipline, the latter is found to positively impact charter value. Additionally, higher risk-taking is found to exert a weakening effect on market discipline.