IDEAS home Printed from https://ideas.repec.org/p/szg/worpap/0008.html
   My bibliography  Save this paper

The Limits of Market Discipline in Reducing Banks' Risk Taking

Author

Abstract

This paper analyzes the influence of market discipline on the risk-taking incentives of banks. It is shown that market discipline reduces risk if banks can credibly commit to a given level of risk before the interest rate on deposits is set. If, however, the bank can readjust the level of risk after the deposit rate is contracted, market discipline leads to an increase in risk. The reason is that rational depositors anticipate the banks' behavior and therefore ask for a higher risk premium ex ante. Facing a higher interest burden, the banks in turn have an even greater incentive to increase risk becouse the option to go bankrupt is more valuable.

Suggested Citation

  • Jürg Blum, 2000. "The Limits of Market Discipline in Reducing Banks' Risk Taking," Working Papers 00.08, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:0008
    as

    Download full text from publisher

    File URL: http://www.szgerzensee.ch/fileadmin/Dateien_Anwender/Dokumente/working_papers/wp-0008.pdf
    File Function: Full text
    Download Restriction: None
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Franz R. Hahn, 2001. "Risk-taking and Solvency Regulation in Banking – A Comment," WIFO Working Papers 157, WIFO.

    More about this item

    Keywords

    Market discipline; banks; risk taking; deposit insurance.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:szg:worpap:0008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: library (email available below). General contact details of provider: https://szgerzensee.ch/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.