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The role of market discipline in handling problem banks

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  • David T. Llewellyn

    (Loughborough University)

  • David G. Mayes

    (Bank of Finland)

Abstract

This paper considers the conditions that are necessary for market discipline to complement prompt corrective action (PCA) by the authorities in handling problem banks. We initially consider precisely what market discipline means in this context, who exercises it and the preconditions that are necessary for it to operate effectively. We explore the incentives that are necessary for PCA and market discipline to reinforce rather than cancel each other and in particular consider the limits to market discipline in this context from corporate governance and from difficulties in valuation. While our analysis is primarily aimed at advanced countries, we also examine problems in emerging markets and how deposit insurance arrangements might conflict with the aims of both PCA and market discipline.

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File URL: http://128.118.178.162/eps/fin/papers/0404/0404020.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0404020.

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Date of creation: 29 Apr 2004
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Handle: RePEc:wpa:wuwpfi:0404020

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Web page: http://128.118.178.162

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Keywords: market discipline; banks; prompt corrective action;

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References

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  1. Samu Peura & Esa Jokivuolle, 2004. "Simulation-based stress testing of banks’ regulatory capital adequacy," Finance 0405003, EconWPA.
  2. Iftekhar Hasan & Heiko Schmiedel, 2004. "Do networks in the stock exchange industry pay off? European evidence," International Finance 0405002, EconWPA.
  3. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Research Discussion Papers 6/2003, Bank of Finland.
  4. Evans, George W. & Honkapohja, Seppo, 2003. "Friedman's money supply rule vs optimal interest rate policy," Research Discussion Papers 10/2003, Bank of Finland.
  5. Timothy D. Lane, 1993. "Market Discipline," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 53-88, March.
  6. Joseph Bisignano, 1998. "Towards an Understanding of the Changing Structure of Financial Intermediation - An Evolutionary Theory of Institutional Survival," SUERF Studies, SUERF - The European Money and Finance Forum, number 4 edited by Morten Balling.
  7. Mayes, David G., 1998. "Improving Banking Supervision," Research Discussion Papers 23/1998, Bank of Finland.
  8. David T. Llewellyn & David G. Mayes, 2004. "The role of market discipline in handling problem banks," Finance 0404020, EconWPA.
  9. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper 2000-24, Federal Reserve Bank of Atlanta.
  10. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland.
  11. Mayes, David G., 2004. "Who pays for bank insolvency?," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 515-551, April.
  12. Urs Birchler & Andréa M. Maechler, 2001. "Do Depositors Discipline Swiss Banks?," Working Papers 01.06, Swiss National Bank, Study Center Gerzensee.
  13. Robert A. Eisenbeis & Larry D. Wall, 2002. "The major supervisory initiatives post-FDICIA: Are they based on the goals of PCA? Should they be?," Working Paper 2002-31, Federal Reserve Bank of Atlanta.
  14. Joseph Bisignano, 1998. "Towards an Understanding of the Changing Structure of Financial Intermediation: An Evolutionary Theory of Institutional Survival," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
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Citations

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Cited by:
  1. Önder, Zeynep & Özyildirim, Süheyla, 2008. "Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?," World Development, Elsevier, vol. 36(8), pages 1415-1435, August.
  2. David T. Llewellyn & David G. Mayes, 2004. "The role of market discipline in handling problem banks," Finance 0404020, EconWPA.
  3. Edward J. Kane & Rosalind Bennett & Robert Oshinsky, 2008. "Evidence of Improved Monitoring and Insolvency Resolution after FDICIA," NBER Working Papers 14576, National Bureau of Economic Research, Inc.
  4. Mayes, David G, 2009. "Early intervention and prompt corrective action in Europe," Research Discussion Papers 17/2009, Bank of Finland.
  5. Mayes, David G. & Nieto, María J. & Wall, Larry, 2008. "Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?," Journal of Financial Stability, Elsevier, vol. 4(3), pages 232-257, September.
  6. McIntyre, M.L. & Tripe, David & Zhuang, Xiaojie (Jeff), 2009. "Testing for effective market supervision of New Zealand banks," Journal of Financial Stability, Elsevier, vol. 5(1), pages 25-34, January.
  7. David G. Mayes, 2008. "Avoiding the Next Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 9(4), pages 44-50, December.
  8. Mayes, David G & Nieto, Maria J & Wall , Larry, 2007. "Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution?," Research Discussion Papers 7/2007, Bank of Finland.
  9. Mayes, David G., 2004. "Who pays for bank insolvency?," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 515-551, April.
  10. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland.

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