Making depositors greedy and careless: Government safety nets and the degradation of depositor discipline

Abstract

AbstractIn emerging countries, deposits play an important role in banks' total funding; hence, depositor discipline may significantly impact banking performance and financial system stability. This paper investigates depositor discipline before and after Vietnam's 2008–2011 banking crisis when depositors had little experience regarding bank bailouts and the amount of deposit insurance was limited to a low cap. The study points out that before the crisis, the level of deposit financing in banks depended on both the interest rates offered and on measures of banks' risk‐taking. After the crisis, given that the Vietnamese government prevented all bank failures to ensure economic, political, and social stability, depositors still react to interest rate changes, but substantially less to risk. This suggests that they have learned that their deposits are safe regardless of the risk the bank is taking.