The Riskiness of Banks: An Empirical Analysis of the Depositor’s Sensitivity

Abstract

This study focuses on checking for the existence and strength of the market discipline based on different ownership structures of the banks. First, this article determines if depositors react rationally to risk levels depending on the bank's ownership type, and second, if the strength of this responsiveness differs depending on the bank's ownership type. This study is based on 38 banks in the Indian banking sector. Empirical testing is carried out using panel data analysis and various proxies to assess the riskiness of the banks. The analysis shows that market discipline exists regardless of the kind of ownership. However, its strength varies across different ownership structures of the banks. These findings are crucial for the orderly functioning of the banking system so that the bank managers do not take advantage of the market perception based on their state ownership.