Covid-19 and market discipline: Evidence from the banking sector in emerging markets

Abstract

In this study, we use a comprehensive sample of commercial banks from twenty-four emerging markets to assess the presence of market discipline before and after the Covid-19 outbreak. We employ a pre-Covid sample from 2015 to 2019 and a Covid-infected sample from 2020 to 2022. Based on the fixed effect panel specifications, we could not establish the existence of market discipline during Pre Covid years. However, we report strong evidence of market discipline during the outbreak and this was consistent for both growth and cost of deposits. The results were persistent after controlling for multiple exogenous variables. Our results establish that the depositors’ discipline was a manifest response to the uncertainty induced by the health crisis and it has contributed to the overall resistance of the banking sector in these economies. We conclude that market discipline is the new normal for emerging markets and this phenomenon will not only contribute to monetary resilience but also will ensure customer-centric financial intermediation.