Deposit Structure, Market Discipline, and Ownership Type: Evidence from Indonesia.

Summary In this paper, we extend the literature on the discipline imposed by depositors to banks by disentangling the impact of macro risk and micro risk. We also take advantage of a unique dataset in which depositors are split into different categories of deposit size in different types of banks (bank ownership structure). We consider the Banking Stability Index, which is used by the Indonesia Deposit Insurance Corporation as a dashboard to monitor the banking stability at the country level as well as individual stability measures such as the Z-score. Using monthly data from 2005 to 2013 our findings show that both macro and micro levels of risk are considered by depositors to discipline banks. Large uninsured depositors are more effective in disciplining banks highlighting the credibility of the insurance system in place. Bank ownership type also matters in explaining the difference in market discipline by depositors.