Market Discipline and Mongolian Depositors

ABSTRACT Investors and depositors play a significant role in maintaining financial stability. The combination of economic policies and a supervision system implemented by the government, coupled with the participation of investors and depositors, contributes to the market safety net. In the first quarter of 2011, the current blanket guarantee covers monetary deposits worth MNT 4.8 trillion, an amount 1.7 times greater than Mongolian state budget’s overall income and grants. Therefore, depositors’ activity vitally supports development in the financial sector, serving furthermore, as an important motivation behind the economic development and the elimination of costs associated with the state budget. However, investors and depositors often do not receive adequate information on which to make their decisions.This paper analyzes the response of depositors to publicly available information, through econometric testing for the presence of market discipline in Mongolia. The findings show that market discipline is relatively poor in Mongolia. Mongolian depositors can distinguish between very risky and less risky banks. However, comprehensive risk variables are statistically insignificant, and it remains difficult to make a precise interpretation, indicating the possibility that many opposing factors affect the growth of deposits.Information often comes to a bank’s stakeholders, including depositors, with several lags, while creative accounting practices can pose further challenges to accurate assessments. Thus, depositors regularly make their decisions too late. Additional findings suggest depositors hardly make any response to a bank’s profitability and efficiency due to information symmetry and a lack of sufficient information in the market. Mongolia needs to implement policy actions to improve transparency and disclose necessary information about banks and listed companies. Such disclosures, related to the management and activities of banks and listed companies, to investors and market participants should be included in a new corporate governance code.