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Enhancing Bank Transparency: Risk Ineffciency as a Market Disciplining Mechanism

Author

Listed:
  • Vander Vennet Rudi

    (Ghent University)

  • De Jonghe Olivier

    (European Banking Center, Tilburg University)

  • De Bruyckere Valerie

    (Ghent University)

  • Baele Lieven

    (CentER, Netspar, Tilburg University)

Abstract

This paper develops a stochastic frontier methodology to jointly test for market monitoring and influencing in a sample of US Bank Holding Companies over the period 1991-2008. First, we confirm the existence of market monitoring by linking stock market based risk measures to business model indicators and fundamental bank characteristics (in particular, constituents of the CAMEL rating). Second, we interpret the distance from the stochastic frontier as a measure of risk inefficiency relative to the best performing peers and show that the variance of this component is predominantly related to management discretion and opaqueness and less to business complexity. Finally, we find stronger evidence for the influencing channel of market discipline compared to most of the existing literature. Poorly performing banks will act faster to contain their risk and improve their performance in response to a deteriorating risk inefficiency score.

Suggested Citation

  • Vander Vennet Rudi & De Jonghe Olivier & De Bruyckere Valerie & Baele Lieven, 2011. "Enhancing Bank Transparency: Risk Ineffciency as a Market Disciplining Mechanism," 2011 Meeting Papers 559, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:559
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    References listed on IDEAS

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    Cited by:

    1. Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    2. Molyneux, Philip & Schaeck, Klaus & Zhou, Tim Mi, 2014. "‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 258-282.

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