What Undermines Market Discipline in Russian Regions: Regionalism or Trust to Local Authorities?

Abstract: For the Russian market for personal deposits, which is regionally segmented with virtually no federal-level competition, it is extremely important to consider the regional-level sources of depositors’ confidence, undermining the market discipline. We focus on the banks’ regional ties as factor making depositors less sensitive to banks’ riskiness. Using the 2001-2010 bank-level and region-level data, we show that the regional ties provide a signal of reliability for the retail depositors during the financial crisis of 2008-2009: riskier banks, which are regionally-tied, suffer much less from the reduction of the deposit growth. The regional ties undermine the market discipline even more significantly in the regions with higher degree of regionalism. Reliance on the regional authorities, in contrast, is not a source of implicit guaranties and does not undermine disciplining.