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Rethinking market discipline in banking : lessons from the financial crisis

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  • Stephanou, Constantinos

Abstract

The main objective of this paper is to rethink the use of market discipline for prudential purposes in light of lessons from the financial crisis. The paper develops the main building blocks of a market discipline framework, and argues for the need to take an expansive view of the concept. It also illustrates using actual bank case studies from the United States its apparent failures in the crisis, particularly the failure to prevent the buildup of systemic, as opposed to idiosyncratic, risks. However, while the role of market discipline in the design of macro-prudential regulation appears to be largely constrained, more can be done on the micro-prudential side to promote clearer market signals of bank riskiness and to encourage their use in the supervisory process.

Suggested Citation

  • Stephanou, Constantinos, 2010. "Rethinking market discipline in banking : lessons from the financial crisis," Policy Research Working Paper Series 5227, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5227
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    Citations

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    Cited by:

    1. Hong Liu & Phil Molyneux & John O. S. Wilson, 2013. "Competition And Stability In European Banking: A Regional Analysis," Manchester School, University of Manchester, vol. 81(2), pages 176-201, March.
    2. Apanard P. Prabha & Clas Wihlborg & Thomas D. Willett, 2012. "Market Discipline for Financial Institutions and Markets for Information," Chapters,in: Research Handbook on International Banking and Governance, chapter 13 Edward Elgar Publishing.
    3. repec:bbz:fcpbbr:v:10:y:2013:i:4:p:65-90 is not listed on IDEAS
    4. Hou, Xiaohui & Gao, Zhixian & Wang, Qing, 2016. "Internet finance development and banking market discipline: Evidence from China," Journal of Financial Stability, Elsevier, vol. 22(C), pages 88-100.
    5. Prabha, Apanard (Penny) & Wihlborg, Clas, 2014. "Implicit guarantees, business models and banks’ risk-taking through the crisis: Global and European perspectives," Journal of Economics and Business, Elsevier, vol. 76(C), pages 10-38.
    6. Barbara Casu & Claudia Girardone & Philip Molyneux, 2012. "Is There a Conflict between Competition and Financial Stability?," Chapters,in: Research Handbook on International Banking and Governance, chapter 3 Edward Elgar Publishing.
    7. Andreas G.F. Hoepner & John O.S. Wilson, 2012. "Social, Environmental, Ethical and Trust (SEET) Issues in Banking: An Overview," Chapters,in: Research Handbook on International Banking and Governance, chapter 24 Edward Elgar Publishing.
    8. Malgorzata Olszak & Mateusz Pipien & Sylwia Roszkowska & Iwona Kowalska, 2014. "The effects of capital on bank lending in large EU banks – the role of procyclicality, income smoothing, regulations and supervision," Faculty of Management Working Paper Series 52014, University of Warsaw, Faculty of Management.
    9. Anolli, Mario & Beccalli, Elena & Molyneux, Philip, 2014. "Bank earnings forecasts, risk and the crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 309-335.
    10. Raoudha Dhouibi & Abir Mabrouk & Emna Rouetbi, 2016. "Bank Transparency and Risk Taking: Empirical Evidence from Tunisia," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(5), pages 111-123, May.
    11. Bushman, Robert M., 2014. "Thoughts on financial accounting and the banking industry," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 384-395.

    More about this item

    Keywords

    Banks&Banking Reform; Debt Markets; Markets and Market Access; Emerging Markets; Access to Finance;

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