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Market discipline at German savings banks‡

Sweden’s bad banks, Securum and Retriva, managed to limit losses on non-performing assets. A successful resolution also appears to be on the horizon for Berliner Immobilien Holding. 25 With the application of the principle that the stockholders should bear losses first, it was possible to secure relatively low prices for the acquired assets. This circumvented potential “lemon market” effects. At the same time, there were no incentives established for shareholders to rely on the expectation of government assistance in the future. The partners involved in negotiations for the restructuring of the troubled assets were clearly identifiable and accessible,. | Market discipline at German savings banks Andreas Pfingsten Norbert Strater University of Munster University of Munster Daniel Wissing University of Munster September 4 2008 Í Using the BankScope data base was made possible by a generous grant from the Sparda-Bank Munster eG. For helpful comments on earlier versions of this paper we are indebted to Andrea Schertler and Mark Trede as well as to participants of the HypoVereinsbank PhD workshop in Kiel the Finance Research Seminar in Munster and the Econometrics Research Seminar in Munster. Not having incorporated all suggestions in the present work is our own responsibility as are remaining errors and omissions. Finance Center Munster University of Munster Universitătsstr. 14-16 48143 Munster Germany andreas. pfingsten@wiwi. uni- muenster. de Finance Center Munster University of Munster Universitătsstr. 14-16 48143 Munster Germany norbert.straeter@wiwi.uni-muenster.de Corresponding author Finance Center Munster University of Munster Universitătsstr. 14-16 48143 Munster Germany daniel.wissing@wiwi.uni-muenster.de 1 2 Abstract Several theoretical studies suggest that only uninsured depositors have an incentive to discipline their banks i. e. react with changes in deposit volumes or in required interest rates as a reaction to changes in banks risk. This paper empirically investigates whether German savings banks are disciplined by their depositors although these should be regarded as fully insured due to public guarantees. Using accounting data for the years 1998 through 2005 we analyze whether the withdrawal behavior and the required risk premia change as predicted by the theory. We find that insured depositors too discipline banks by demanding higher interest rates and to a moderate extent by withdrawing their deposits. Thus depositors apparently exert market discipline even when they are fully insured against losses. Key Words Banking regulation market discipline deposit insurance savings banks Germany. JEL .