MARKET DISCIPLINE BY DEPOSITORS - EVIDENCE FROM REDUCED-FORM EQUATIONS

This paper examines the effects of bank risk, estimated as the probabi lity of failure based on actual failure records, on the interest rate and the growth of large time deposits between 1985 and 1992. During th e period, riskier banks paid higher interest rates but experienced slo wer growth of large time deposits. These results indicate that risky b anks faced unfavorable supply schedules of large time deposits and, he nce, support the presence of market discipline by large time depositor s. The empirical analysis also considers the effect of bank size, but fails to find evidence that depositors preferred large banks