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Journal of Banking & Finance Vol. 37 No. 8 2013

Financial contagion and depositor monitoring

Augusto Hasman1,2; Margarita Samartín; Jos van Bommel3,4

1 Centre d'études Européennes de Sciences Po · 2 Graduate Institute of International and Development Studies · 3 Luxembourg School of Business · 4 University of Luxembourg

open access

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.

DOI
10.1016/j.jbankfin.2013.02.037
Volume
37
Issue
8
Pages
3076-3084
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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