Rethinking market discipline in banking : lessons from the financial crisis
AbstractThe 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 InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5227.
Date of creation: 01 Mar 2010
Date of revision:
Banks&Banking Reform; Debt Markets; Markets and Market Access; Emerging Markets; Access to Finance;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-BAN-2010-03-13 (Banking)
- NEP-FMK-2010-03-13 (Financial Markets)
- NEP-REG-2010-03-13 (Regulation)
- NEP-RMG-2010-03-13 (Risk Management)
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- Phil Molyneux & Hong Liu & John O.S. Wilson, 2010.
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- Hong Liu & Phil Molyneux & John O. S. Wilson, 2013. "Competition And Stability In European Banking: A Regional Analysis," Manchester School, University of Manchester, vol. 81(2), pages 176-201, 03.
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