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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
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  1. Joseph Bisignano, 1998. "Towards an Understanding of the Changing Structure of Financial Intermediation: An Evolutionary Theory of Institutional Survival," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  2. Timothy D. Lane, 1993. "Market Discipline," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 53-88, March.
  3. Iftekhar Hasan & Heiko Schmiedel, 2004. "Do networks in the stock exchange industry pay off? European evidence," International Finance 0405002, EconWPA.
  4. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Research Discussion Papers 6/2003, Bank of Finland.
  5. Urs Birchler & Andréa M. Maechler, 2001. "Do Depositors Discipline Swiss Banks?," Working Papers 01.06, Swiss National Bank, Study Center Gerzensee.
  6. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland.
  7. Evans, George W. & Honkapohja, Seppo, 2003. "Friedman's money supply rule vs optimal interest rate policy," Research Discussion Papers 10/2003, Bank of Finland.
  8. Robert A. Eisenbeis & Larry D. Wall, 2002. "The major supervisory initiatives post-FDICIA: Are they based on the goals of PCA? Should they be?," Working Paper 2002-31, Federal Reserve Bank of Atlanta.
  9. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper Series WP-00-7, Federal Reserve Bank of Chicago.
  10. Mayes, David G., 1998. "Improving Banking Supervision," Research Discussion Papers 23/1998, Bank of Finland.
  11. Llewellyn, David T. & Mayes , David G., 2003. "The role of market discipline in handling problem banks," Research Discussion Papers 21/2003, Bank of Finland.
  12. Joseph Bisignano, 1998. "Towards an Understanding of the Changing Structure of Financial Intermediation - An Evolutionary Theory of Institutional Survival," SUERF Studies, SUERF - The European Money and Finance Forum, number 4 edited by Morten Balling, May.
  13. Samu Peura & Esa Jokivuolle, 2004. "Simulation-based stress testing of banks’ regulatory capital adequacy," Finance 0405003, EconWPA.
  14. Mayes, David G., 2004. "Who pays for bank insolvency?," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 515-551, April.
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