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Rethinking market discipline in banking : lessons from the financial crisis

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  • Stephanou, Constantinos

Abstract

The main objective of this paper is to rethink the use of market discipline for prudential purposes in light of lessons from the financial crisis. The paper develops the main building blocks of a market discipline framework, and argues for the need to take an expansive view of the concept. It also illustrates using actual bank case studies from the United States its apparent failures in the crisis, particularly the failure to prevent the buildup of systemic, as opposed to idiosyncratic, risks. However, while the role of market discipline in the design of macro-prudential regulation appears to be largely constrained, more can be done on the micro-prudential side to promote clearer market signals of bank riskiness and to encourage their use in the supervisory process.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5227.

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Date of creation: 01 Mar 2010
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Handle: RePEc:wbk:wbrwps:5227

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Related research

Keywords: Banks&Banking Reform; Debt Markets; Markets and Market Access; Emerging Markets; Access to Finance;

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Cited by:
  1. Phil Molyneux & Hong Liu & John O.S. Wilson, 2010. "Competition and Stability in European Banking: A Regional Analysis," Working Papers 10019, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  2. José Alves Dantas & Otávio Ribeiro de Medeiros & Paulo Roberto Barbosa Lustosa, 2013. "The Role of economic variables and credit portfolio attributes for estimating discretionary loan loss provisions in Brazilian banks," Brazilian Business Review, Fucape Business School, vol. 10(4), pages 65-90, October.
  3. Anolli, Mario & Beccalli, Elena & Molyneux, Philip, 2014. "Bank earnings forecasts, risk and the crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 309-335.

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