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The role of market discipline in handling problem banks

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Author Info
David T. Llewellyn (Loughborough University)
David G. Mayes (Bank of Finland)

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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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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://129.3.20.41

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Related research
Keywords: market discipline; banks; prompt corrective action;

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Find related papers by JEL classification:
G - Financial Economics

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.:
  1. Eric Schaling, 2004. "Learning, inflation expectations and optimal monetary policy," Macroeconomics 0404035, EconWPA. [Downloadable!]
    Other versions:
  2. Samu Peura & Esa Jokivuolle, 2004. "Simulation-based stress testing of banks’ regulatory capital adequacy," Finance 0405003, EconWPA. [Downloadable!]
  3. Iftekhar Hasan & Heiko Schmiedel, 2004. "Do networks in the stock exchange industry pay off? European evidence," International Finance 0405002, EconWPA. [Downloadable!]
    Other versions:
  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. [Downloadable!]
    Other versions:
  5. Tuomas Takalo & Otto Toivanen, 2004. "Equilibrium in financial markets with adverse selection," Finance 0405001, EconWPA. [Downloadable!]
    Other versions:
  6. Llewellyn, David T. & Mayes , David G., 2003. "The role of market discipline in handling problem banks," Research Discussion Papers 21/2003, Bank of Finland. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, 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.)

  1. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland. [Downloadable!]
  2. 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. [Downloadable!]
  3. David T. Llewellyn & David G. Mayes, 2004. "The role of market discipline in handling problem banks," Finance 0404020, EconWPA. [Downloadable!]
    Other versions:
  4. 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. [Downloadable!]
  5. Kauko, Karlo, 2003. "Interlinking securities settlement systems: A strategic commitment?," Research Discussion Papers 26/2003, Bank of Finland. [Downloadable!]
  6. Vauhkonen, Jukka, 2003. "Are adverse selection models of debt robust to changes in market structure?," Research Discussion Papers 28/2003, Bank of Finland. [Downloadable!]
  7. Mayes, David G, 2009. "Early intervention and prompt corrective action in Europe," Research Discussion Papers 17/2009, Bank of Finland. [Downloadable!]
  8. David G. Mayes & María J. Nieto & Larry Wall, 2008. "Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?," Banco de España Working Papers 0819, Banco de España. [Downloadable!]
    Other versions:
  9. 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. [Downloadable!] (restricted)
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