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The role of market discipline in handling problem banks

  • David T. Llewellyn

    (Loughborough University)

  • David G. Mayes

    (Bank of Finland)

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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File URL: http://econwpa.repec.org/eps/fin/papers/0404/0404020.pdf
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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
Note: Type of Document - pdf
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Eric Schaling, 2004. "Learning, inflation expectations and optimal monetary policy," Macroeconomics 0404035, EconWPA.
  2. Hasan, Iftekhar & Schmiedel, Heiko, 2003. "Do networks in the stock exchange industry pay off? : European evidence," Research Discussion Papers 2/2003, Bank of Finland.
  3. Samu Peura & Esa Jokivuolle, 2004. "Simulation-based stress testing of banks’ regulatory capital adequacy," Finance 0405003, EconWPA.
  4. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Research Discussion Papers 6/2003, Bank of Finland.
  5. Evans, George W. & Honkapohja, Seppo, 2003. "Friedman's money supply rule vs optimal interest rate policy," Research Discussion Papers 10/2003, Bank of Finland.
  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.
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