The Relationship Between Depositor Market Discipline And Official Supervision, Bank Internal Control

In early2007, the subprime crisis broke out, causing far-reaching impacts. Facingincreasingly complex financial transactions and financial environment, economistsand regulators should find more effective ways to control bank risk. To preventfinancial crises, one of the methods is to rely on the market discipline. Bankdepositors are playing a growing important role on maintain a healthy and steadysystem of bank. We have studied by this research to further enrich the theory ofdepositor market discipline. Under the environment of globalization and financialinnovation, we explore the market’s self-stabilizing mechanism of the bankingindustry.The depositor market discipline and official supervision, internal risks controlmechanism have a particular relationship. They constraints on bank excessiveadventure activity. The research efforts to build a comprehensive framework of thebanking supervision mechanism to help to propose improvement policy, strengthenthe overall stability of the banking sector. First, we briefly browse the relevantliterature, to achieve better understanding of depositor market discipline mechanism;Second, set China and the U.S. banking industry data as the main object of this study.Based on María Soledad Martínez and Sergio Schmukler’s econometric model, weadd capital adequacy, deposit insurance, internal control variables to empiricallyexamining the relationship between them. The sample includes fourteen Chinesecommercial banks, fourteen U.S. commercial banks. We use a panel data approach.Through theoretical and empirical research, we obtained some conclusions. First,after Subprime mortgage crisis, the U.S. banking industry significantly increasedcontagion effect, and depositors pay more attention to liquidity risk of banks. Second,banking depositor market discipline is effective. In the U.S., savings deposit rateswere the main way to constraint bank’s risk behavior, while in China were the depositquantity. Third, the supervision on capital adequacy ratio decreased the sensitivity ofthe U.S. depositors to Bank risk, but has little impact on China. Fourth, invisibledeposit insurance has hardly help in increasing deposit quantity, but dominant depositinsurance can reduce the risk, so banks can reduce the interest rate to attract savings. In short, the official regulation and depositor market discipline can mutually reinforcingeach other. Internal risk control will affect the bank’s deposits. In contrast to China, theU.S. internal control mechanism corrects bank excessive risk behavior more quickly.