Market Discipline and Bank Risk-Taking: The Interbank Deposit Perspective

Abstract

This paper investigates the relation between market discipline and bank risk-taking for Tanzanian commercial banks during the period 2009-2017. In the fixed effect (within) estimator, it uncovers mixed results. It found some support that market discipline exists and via interbank deposit reduced bank risk (i.e. credit risk). Contrary to expectation, the finding exhibits that the link between the interaction of market discipline and bank capital on bank risk is negative and statistically significant. It is also evident that bank capital, off-balance items, and size better explain the variation in bank risk. The results serve as a policy hint to banks’ regulators and policymakers in strengthening market discipline framework for the reduction of bank risk-taking.