In this paper, we test for the presence of market discipline in the Swiss deposit market. In particular, we examine whether depositors monitor their banks by withdrawing their saving deposits whenever the fundamentals of their bank is no longer satisfactory. We use a panel of bank-specific data an 250 Swiss banks over the period 1987-1998. We find considerable evidence of market discipline, in the sense that depositors are sensitive to bank-specific fundamentals, to institutional differences across bank groups, and to institutional changes in the Swiss depositor protection system. Our study complements the existing literature which predominantly builds on price indicators of market discipline (like yield spreads) by an approach based on quantities (the uninsured share of deposits). As few banks have traded debt outstanding, our approach is applicable to a much larger number of banks, including banks from non-industrialized countries.
