Depositor Discipline and Bank Risk-Taking Behavior: Evidence from the South-East Asian Financial Crises

Abstract

This paper examines whether the risk-taking behavior of commercial banks in five countries of South-East Asia changed after the Asian Crises of 1997. The paper utilizes the framework created by Gruben et al (1997, 1998, and 2003). It also examines the connection between the risk-taking behavior and depositor discipline of these banks after the Asian Crises of 1997. Based on bank level data from the Bank Scope, 2005 CD, he paper presents evidence that the state of depositor discipline is very weak in the selected countries even after the Asian Crises. Evidence also shows that the risk taking behavior of commercial banks did not change much before and after the Asian Crises of 1997, and that perfect competition prevailed both before and after the Crises in the banking sector. Finally, evidence also shows that the there is no connection between risk-taking behavior and depositor discipline.