An empirical assessment of the responses of bank depositors to adverse selection and moral hazard: the case of the Mexican banking industry

• Autores: Adrián Pardo Ostos
• Directores de la Tesis: Pascual Berrone (dir. tes.)
• Lectura: En la Universidad de Navarra ( España ) en 2015
• Idioma: español
• Tribunal Calificador de la Tesis: Joan Enric Ricart i Costa (presid.), Fabrizio Ferraro (secret.), Juan Santaló Mediavilla (voc.), Luis R. Gomez-Mejia (voc.), Andrea Fosfuri (voc.)
• Materias:
  • Ciencias económicas
    • Organización y dirección de empresas
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• Resumen

  • This dissertation explores potential reactions of savings depositors to recurrent problems of adverse selection and moral hazard, taking as a case study the Mexican banking sector.

    Adverse selection occurs when an individual is willing to participate in an economic activity (e.g., to make a purchase) but cannot discern among the available choices to select the one that will meet her expectations in terms of quality; she thus ends up selecting an underperforming option. This phenomenon arises primarily because the would-be purchaser lacks adequate information. These information asymmetries weaken the effectiveness of market mechanisms: prices (or other similar instruments), which are assumed to convey full information on a given market (Milgrom & Roberts, 1992), cease to capture crucial information and hence become insufficient. Amid this lack of informative mechanisms, market participants’ selection processes come to resemble random choice.

    Moral hazard, in turn, arises from power imbalances. When a given individual’s range of action is strongly constrained by a system’s boundaries, certain counterparties acquire positions of relative power that allow them to reap greater benefits from the enterprise while sharing the risks among all participants. This temptation to unjustly profit at the expense of generating losses to others is known as moral hazard. As such, adverse selection can be defined as a problem of choice, while moral hazard is one of monitoring and discipline.

    I examine both phenomena through a case study of savings depositors, considering how they deal with asymmetric information and cultural influences in the processes of bank selection and monitoring. In doing so, I assess whether either of these two events leads systematically to adverse selection and/or moral hazard. Finally, I also try to measure depositors’ capacity to respond to observable moral abuse.

    Understanding the decision-making processes and levels of knowledge sophistication of a particular region’s depositors can help financial regulators identify how best to respond when facing a critical event. This study can thus provide relevant information to financial supervisory agencies. The study can also help to promote alternative sources of market discipline; it is rather difficult to enforce discipline from a single source, currently supervisory bodies carry the full burden of bank monitoring and policies aimed at protecting depositors’ savings can encourage further moral hazard. This is true, for example, of deposit insurance schemes and “too big to fail” (TBTF) policies. The former guarantee payment of depositors’ claims in the case of bankruptcy, thereby removing a portion of the costs that banks should have to bear and encouraging further engagement in risky activities. The latter is an unambiguous recognition of certain banks as essential to the functioning of the financial system and thus enabling banks to anticipate bailouts in case of distress. This recognition provides incentives for large banks to increase their risk exposures. Financial supervisors could greatly benefit from delegating some aspects of market discipline to sophisticated depositors. These individuals could exert discipline in several different ways, including through the bank selection process, which would encourage competition centered on financial soundness and higher interest rates. Depositors could also discipline banks by engaging in switching activities and exerting focalized runs, which would credibly threaten the banks operating in the system, or by providing unequivocal information on bank distress to regulators. To be able to pass on such tasks to depositors it is crucial to first study their savings preferences and responses to market failures such as adverse selection and moral hazard.