Abstract
We estimate the conditions under which depositor discipline is effective after a major bank crisis. In particular, we study the response of depositors in the Russian Federation and Turkey to risk-taking behavior of banks. In the Russian Federation depositors increased their deposits in well-capitalized and liquid banks in the aftermath of the crisis in 1998. Furthermore, more efficient banks were able to increase depositors' confidence. These results support existence of growing market discipline in the Russian banking industry. Similar discipline is observed in the Turkish banking industry. However, institutional factors and the structure of banking industry significantly affect the discipline exercised by depositors. Particularly, costly bailouts by bank supervisors in Turkey reduce response of depositors to bank riskiness thus rendering market discipline ineffective.
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