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Regulating Banks through Market Discipline: A Survey of the Issues

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  • Marc J. K. De Ceuster
  • Nancy Masschelein
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    Abstract

    The interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed New Capital Accord. This paper reviews the potential role market discipline can play in financial regulation. We start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms. Next, a definition of market discipline as a regulatory mechanism is advanced. We evaluate the disciplining power various market participants have. Finally, we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism. In this respect, the Basle Committee has taken the right approach. Copyright Blackwell Publishing Ltd, 2003.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

    Volume (Year): 17 (2003)
    Issue (Month): 5 (December)
    Pages: 749-766

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    Handle: RePEc:bla:jecsur:v:17:y:2003:i:5:p:749-766

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    Cited by:
    1. Cristina Alexandrina Ștefănescu, 2014. "Transparency in European banking system – a technical and economic approach," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(51), pages 91-105, March.
    2. Faidon Kalfaoglou & Alexandros Sarris, 2006. "Modeling the Components of Market Discipline," Working Papers 36, Bank of Greece.
    3. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2006. "The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis," Review of Quantitative Finance and Accounting, Springer, vol. 27(4), pages 403-438, December.
    4. Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Working Papers 07-9, Bank of Canada.
    5. Uchida, Hirofumi & Satake, Mitsuhiko, 2009. "Market discipline and bank efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 792-802, December.
    6. Ioannidis, Christos & Pasiouras, Fotios & Zopounidis, Constantin, 2010. "Assessing bank soundness with classification techniques," Omega, Elsevier, vol. 38(5), pages 345-357, October.
    7. Dalla Pellegrina, Lucia & Saraceno, Margherita, 2011. "Securities class actions in the US banking sector: Between investor protection and bank stability," Journal of Financial Stability, Elsevier, vol. 7(4), pages 215-227, December.
    8. Joshua Charap & Jelena Pavlovic, 2009. "Development of the Commercial Banking System in Afghanistan," IMF Working Papers 09/150, International Monetary Fund.
    9. Freixas, Xavier & Laux, Christian, 2011. "Disclosure, transparency, and market discipline," CFS Working Paper Series 2011/11, Center for Financial Studies (CFS).

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