Are banks peer disciplined? Evidence from Russia

Preliminary, not for citing, or publishing Market discipline is usually studied in the markets for individual or firm deposits, leaving aside the interbank loan market. The banks ' ability to exert market discipline is taken for granted, as they are expected to have enough proficiency and expertise to assess correctly the riskiness of their counterparties. However, the "crises of trust "- as the one in 2004 in Russia- create some doubts on whether there exists some efficient peer monitoring and peer disciplining: the interbank loan market may be frozen in response to external information signal unrelated to banks ’ current reliability. This seems to be one of the reasons for the interbank loan markets to be extremely fragile during financial instability periods, undermining smooth functioning of the whole banking system, as the banks are tightly interconnected. Using the data from “Mobile” based on the bank financial statements collected by the Bank of Russia, we provide some evidence for market discipline in the Russian market for interbank loans. We show that the only mechanism that functions is the price-based one: more reliable banks enjoy lower interest rates. The quantitative discipline is, however, absent. The decisions on credit limits are based not on the changes in counterparty’s riskiness but on other information like reputation, soft information or public announcements that may be even unrelated to particular banks