What role, if any, can market discipline play in supporting macroprudential policy?
AbstractThis paper focuses on market discipline as a necessary condition to preserve the signaling content of balance sheet indicators and market prices as macroprudential tools. It argues that market discipline enhances the information content of market prices by reflecting the expected private cost of financial distress, including the systemic importance of particular firms. This paper also argues that three conditions are necessary for market discipline to be effective: adequate and timely information on financial institutions’ risk profiles; financial institutions’ creditors must consider themselves at risk; and the reaction to market signals needs to be observable. The paper relies on the existing financial literature and it is particularly timely because policymakers are considering structural measures of banks’ systemic importance as a benchmark for macroprudential policy.
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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Occasional Papers with number 1202.
Length: 22 pages
Date of creation: Mar 2012
Date of revision:
Financial crisis; international financial markets; financial regulation; financial institutions; bankruptcy; liquidation;
Find related papers by JEL classification:
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G19 - Financial Economics - - General Financial Markets - - - Other
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-BAN-2012-03-28 (Banking)
- NEP-CBA-2012-03-28 (Central Banking)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sarai Criado & Adrian van Rixtel, 2008. "Structured finance and the financial turmoil of 2007-2008: and introductory overview," Banco de Espaï¿½a Occasional Papers 0808, Banco de Espa�a.
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