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Potential Insolvency, Market Efficiency, and Bank Regulation of Large Commercial Banks

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  • Pettway, Richard H.

Abstract

Bank regulators tend to disagree with the idea that markets can play a role in bank regulation. The markets for bank securities are viewed by regulators as inefficient and lacking the necessary information to demand sufficient risk premiums on bank obligations to affect bank management decisions. On the other hand, bankers who have an active market for their securities tend to place faith in market assessments to determine the cost of management policies; therefore, they tend to think that the market plays an important role in “regulating†bank management decisions. The regulators are perhaps correct about the markets for small and medium–sized banks, but for those banks which have an active market for their securities, do investors adjust rates of return for the presence of increased potential of bankruptcy? If so, when does the adjustment take place?

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  • Pettway, Richard H., 1980. "Potential Insolvency, Market Efficiency, and Bank Regulation of Large Commercial Banks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(1), pages 219-236, March.
    • Handle: RePEc:cup:jfinqa:v:15:y:1980:i:01:p:219-236_00
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    Cited by:

    1. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, vol. 54(4), pages 361-387.
    2. Allen N. Berger & Margaret K. Kyle & Joseph M. Scalise, 2001. "Did U.S. Bank Supervisors Get Tougher during the Credit Crunch? Did They Get Easier during the Banking Boom? Did It Matter to Bank Lending?," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 301-356, National Bureau of Economic Research, Inc.
    3. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, pages 641-670.
    4. Carlos Alves & Victor Mendes & Paulo Pereira da Silva, 2015. "Do stress tests matter? A study on the impact of the disclosure of stress test results on European financial stocks and CDS markets," Applied Economics, Taylor & Francis Journals, vol. 47(12), pages 1213-1229, March.
    5. Bharati, Rakesh & Nanisetty, Prasad & So, Jacky, 2006. "Dynamic gap transformations: Are banks asset - transformers or brokers? or both?," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(1), pages 36-52, February.
    6. Maximilian J.B. Hall, 2001. "The basle Committee's proposals for a new capital adequacy assessment framework: a critique," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 111-179.
    7. Bremer, Marc & Pettway, Richard H., 2002. "Information and the market's perceptions of Japanese bank risk: Regulation, environment, and disclosure," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 119-139, April.
    8. Kolari, James W. & López-Iturriaga, Félix J. & Sanz, Ivan Pastor, 2020. "Measuring systemic risk in the U.S. Banking system," Economic Modelling, Elsevier, vol. 91(C), pages 646-658.
    9. John Kandrac, 2014. "Modelling the causes and manifestation of bank stress: an example from the financial crisis," Applied Economics, Taylor & Francis Journals, vol. 46(35), pages 4290-4301, December.
    10. Sinkey, Joseph Jr. & Carter, David A., 1999. "The reaction of bank stock prices to news of derivatives losses by corporate clients," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1725-1743, December.
    11. Bhanu Balasubramnian & Ajay A. Palvia & Dilip K. Patro, 2019. "Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(2), pages 119-143, October.
    12. Bhanu Balasubramnian & Ajay Palvia, 2018. "Can short sellers inform bank supervision?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 53(1), pages 69-98, February.
    13. Bystrom, Hans N. E., 2004. "The market's view on the probability of banking sector failure: cross-country comparisons," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(5), pages 419-438, December.
    14. Stephen Cross & Katerina Simons, 1991. "Do capital markets predict problems in large commercial banks?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 51-56.
    15. Alicia García Herrero, 2005. "Determinants of the Venezuelan Banking Crisis of the Mid-1990s: An Event History Analysis," Economía Mexicana NUEVA ÉPOCA, , vol. 0(1), pages 71-115, January-J.
    16. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
    17. repec:erf:erfstu:78 is not listed on IDEAS
    18. Curry, Timothy J. & Elmer, Peter J. & Fissel, Gary S., 2007. "Equity market data, bank failures and market efficiency," Journal of Economics and Business, Elsevier, vol. 59(6), pages 536-559.

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