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Bank management and market discipline

Author

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  • Landskroner, Yoram
  • Paroush, Jacob

Abstract

In recent years, market discipline has attracted interest as a mechanism to augment or replace government regulation of the financial sector and, especially, depository institutions. The ability to substitute market discipline for bank regulation is of much interest and we use a theoretical model to examine it. In a stylized comprehensive model, we incorporate the characteristics of the regulatory structure and examine the effects of different parameters on the optimal decisions of the bank. These parameters include changes in risk, deposit-insurance coverage, and degree of market discipline. Interesting results include the following: (1) an increase in competition should result in less equity financing, higher deposit interest rates, and higher risk premiums (spreads); (2) exogenous shocks, such as an increase in oil prices, will result in more equity financing; (3) the sensitivity of the two types of deposits will react to a change in market discipline in opposite ways. Our theoretical results are consistent with empirical evidence in recent studies.

Suggested Citation

  • Landskroner, Yoram & Paroush, Jacob, 2008. "Bank management and market discipline," Journal of Economics and Business, Elsevier, vol. 60(5), pages 395-414.
  • Handle: RePEc:eee:jebusi:v:60:y:2008:i:5:p:395-414
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    References listed on IDEAS

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    Cited by:

    1. Karima Bouaiss & Catherine Refait-Alexandre & Hervé Alexandre, 2017. "Will Bank Transparency really Help Financial Markets and Regulators?," Working Papers hal-01637917, HAL.
    2. Maria Semenova & Andrey Shapkin, 2016. "Currency Shifts as a Market Discipline Device: The Case of the Russian Market for Personal Deposits," HSE Working papers WP BRP 57/FE/2016, National Research University Higher School of Economics.
    3. repec:dau:papers:123456789/4060 is not listed on IDEAS

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