Financial contagion and depositor monitoring Articles uri icon

publication date

  • August 2013

start page

  • 3076

end page

  • 3084

issue

  • 8

volume

  • 37

International Standard Serial Number (ISSN)

  • 0378-4266

Electronic International Standard Serial Number (EISSN)

  • 1872-6372

abstract

  • This paper analyzes market discipline in a many-bank economy where contagion and bank runs interact. We present a model with differently-informed depositors, where those depositors that are more informed have incentives to monitor banks' investments. It is shown that when banks are undercapitalized, and the probability of success of the risky asset is low, depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment.The results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline. (c) 2013 Elsevier B.V. All rights reserved.