IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/rdp2003_021.html

The role of market discipline in handling problem banks

Author

Listed:
  • Llewellyn, David T.
  • Mayes, David G.

Abstract

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.

Suggested Citation

  • Llewellyn, David T. & Mayes, David G., 2003. "The role of market discipline in handling problem banks," Bank of Finland Research Discussion Papers 21/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_021
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/211954/1/bof-rdp2003-021.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mayes, David G., 1997. "A market based approach to maintaining systemic stability : experiences from New Zealand," Research Discussion Papers 18/1997, Bank of Finland.
    2. Samu Peura & Esa Jokivuolle, 2004. "Simulation-based stress testing of banks’ regulatory capital adequacy," Finance 0405003, University Library of Munich, Germany.
    3. Llewellyn, David T. & Mayes, David G., 2003. "The role of market discipline in handling problem banks," Research Discussion Papers 21/2003, Bank of Finland.
    4. Urs Birchler & Andréa M. Maechler, 2001. "Do Depositors Discipline Swiss Banks?," Working Papers 01.06, Swiss National Bank, Study Center Gerzensee.
    5. Robert A. Eisenbeis & Larry D. Wall, 2002. "The major supervisory initiatives post-FDICIA: Are they based on the goals of PCA? Should they be?," FRB Atlanta Working Paper 2002-31, Federal Reserve Bank of Atlanta.
    6. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.
    7. Koskela, Erkki & Stenbacka, Rune, 2003. "Equilibrium Unemployment Under Negotiated Profit Sharing," IZA Discussion Papers 840, Institute of Labor Economics (IZA).
    8. Hasan, Iftekhar & Schmiedel, Heiko, 2003. "Do networks in the stock exchange industry pay off? European evidence," Bank of Finland Research Discussion Papers 2/2003, Bank of Finland.
    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. Beck, Thorsten, 2003. "The incentive-compatible design of deposit insurance and bank failure resolution : concepts and country studies," Policy Research Working Paper Series 3043, The World Bank.
    11. Rantala, Anssi, 2003. "Labour market flexibility and policy coordination in a monetary union," Research Discussion Papers 11/2003, Bank of Finland.
    12. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Bank of Finland Research Discussion Papers 6/2003, Bank of Finland.
    13. Khiaonarong, Tanai, 2003. "Payment systems efficiency, policy approaches, and the role of the central bank," Research Discussion Papers 1/2003, Bank of Finland.
    14. Jyrkönen, Hanna & Paunonen, Heli, 2003. "Card, Internet and mobile payments in Finland," Research Discussion Papers 8/2003, Bank of Finland.
    15. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland.
    16. Vauhkonen, Jukka, 2003. "Banks' equity stakes in borrowing firms : A corporate finance approach," Research Discussion Papers 13/2003, Bank of Finland.
    17. Kajanoja, Lauri, 2003. "Money as an indicator variable for monetary policy when money demand is forward looking," Research Discussion Papers 9/2003, Bank of Finland.
    18. George W. Evans & Seppo Honkapohja, 2003. "Friedman's Money Supply Rule vs. Optimal Interest Rate Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 550-566, November.
    19. Vauhkonen, Jukka, 2003. "Financial contracts and contingent control rights," Research Discussion Papers 14/2003, Bank of Finland.
    20. Peura, Samu & Jokivuolle, Esa, 2003. "Simulation-based stress testing of banks' regulatory capital adequacy," Research Discussion Papers 4/2003, Bank of Finland.
    21. Mayes, David G., 1997. "A market based approach to maintaining systemic stability: experiences from New Zealand," Bank of Finland Research Discussion Papers 18/1997, Bank of Finland.
    22. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Research Discussion Papers 6/2003, Bank of Finland.
    23. David G. Mayes & Liisa Halme & Aarno Liuksila, 2001. "Improving Banking Supervision," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-28819-5, December.
    24. David Llewellyn, 2000. "Some Lessons for Regulation from Recent Bank Crises," Open Economies Review, Springer, vol. 11(1), pages 69-109, August.
    25. Granlund, Peik, 2003. "Economic evaluation of bank exit regimes in US, EU and Japanese financial centres," Research Discussion Papers 5/2003, Bank of Finland.
    26. Putkuri, Hanna, 2003. "Cross-country asymmetries in euro area monetary transmission : The role of national financial systems," Research Discussion Papers 15/2003, Bank of Finland.
    27. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago.
    28. Leinonen, Harry, 2003. "Restructuring securities systems processing : A blue print proposal for real-time/t+0 processing," Research Discussion Papers 7/2003, Bank of Finland.
    29. Hasan, Iftekhar & Schmiedel, Heiko, 2003. "Do networks in the stock exchange industry pay off? : European evidence," Research Discussion Papers 2/2003, Bank of Finland.
    30. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Spyros G.Stavrinakis & Christian Harm & David T. Llewellyn & Bridget Gandy & Peter Shaw & Peter Tebbutt & Mark Young, 2007. "Corporate Governance in Financial Institutions," SUERF Studies, SUERF - The European Money and Finance Forum, number 2007/3 edited by Morten Balling, May.
    2. Mayes, David G. & Nieto, María J. & Wall, Larry, 2007. "Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution," Bank of Finland Research Discussion Papers 7/2007, Bank of Finland.
    3. Mayes, David G. & Nieto, María J. & Wall, Larry, 2008. "Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?," Journal of Financial Stability, Elsevier, vol. 4(3), pages 232-257, September.
    4. Holopainen, Helena, 2007. "Integration of financial supervision," Bank of Finland Research Discussion Papers 12/2007, Bank of Finland.
    5. David G. Mayes, 2011. "Early Intervention and Prompt Corrective Action in Europe," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 10, Edward Elgar Publishing.
    6. David G. Mayes, 2011. "Early Intervention and Prompt Corrective Action in Europe," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 10, Edward Elgar Publishing.
    7. Saheruddin, Herman & Soedarmono, Wahyoe, 2022. "Do board size, institutional ownership and external auditors matter to market discipline in Indonesian banking?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 389-395.
    8. Mayes, David G. & Nieto, Maria J. & Wall, Larry, 2007. "Multiple safety net regulators and agency problems in the EU : is Prompt Corrective Action a partial solution," Research Discussion Papers 7/2007, Bank of Finland.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vauhkonen, Jukka, 2003. "Are adverse selection models of debt robust to changes in market structure?," Research Discussion Papers 28/2003, Bank of Finland.
    2. Kauko, Karlo, 2007. "Interlinking securities settlement systems: A strategic commitment?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2962-2977, October.
    3. Llewellyn, David T. & Mayes, David G., 2003. "The role of market discipline in handling problem banks," Research Discussion Papers 21/2003, Bank of Finland.
    4. Jukka Vauhkonen, 2004. "Financial contracts and contingent control rights," Finance 0404022, University Library of Munich, Germany.
    5. Jukka Vauhkonen, 2004. "Banks' equity stakes in borrowing firms: A corporate finance approach," Game Theory and Information 0404003, University Library of Munich, Germany.
    6. Guender, Alfred V., 2003. "Optimal discretionary monetary policy in the open economy: Choosing between CPI and domestic inflation as target variables," Bank of Finland Research Discussion Papers 12/2003, Bank of Finland.
    7. Vauhkonen, Jukka, 2003. "Financial contracts and contingent control rights," Research Discussion Papers 14/2003, Bank of Finland.
    8. Vauhkonen, Jukka, 2003. "Banks' equity stakes in borrowing firms : A corporate finance approach," Research Discussion Papers 13/2003, Bank of Finland.
    9. Guender, Alfred V., 2003. "Optimal discretionary monetary policy in the open economy : Choosing between CPI and domestic inflation as target variables," Research Discussion Papers 12/2003, Bank of Finland.
    10. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.
    11. David T. Llewellyn, 2005. "Inside The‘Black Box’ Of Market Discipline," Economic Affairs, Wiley Blackwell, vol. 25(1), pages 41-47, March.
    12. Mayes, David G., 2005. "Who pays for bank insolvency in transition and emerging economies?," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 161-181, January.
    13. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Bank of Finland Research Discussion Papers 16/2003, Bank of Finland.
    14. David G. Mayes & Aarno Liuksila & Thorsten Beck & Bethany Blowers & Henk Brouwer & Peik Granlund & Christos Hadjiemmanuil & Gerbert Hebbink & Eva H. G. Hüpkes & Eigil Mølgaard & Jón Sigurðsson & Gary , 2004. "Who Pays for Bank Insolvency?," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-52391-3, December.
    15. Ari Hyytinen & Tuomas Takalo, 2002. "Enhancing Bank Transparency: A Re-assessment," Review of Finance, European Finance Association, vol. 6(3), pages 429-445.
    16. David G. Mayes, 2004. "An approach to bank insolvency in transition and emerging economies," Finance 0404015, University Library of Munich, Germany.
    17. repec:onb:oenbwp:y::i:48:b:1 is not listed on IDEAS
    18. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, University Library of Munich, Germany.
    19. David G. Mayes, 2008. "Avoiding the Next Crisis," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(04), pages 44-50, December.
    20. Ari Hyytinen & Tuomas Takalo, 2002. "Enhancing Bank Transparency: A Re-assessment," Review of Finance, European Finance Association, vol. 6(3), pages 429-445.
    21. Kaie Kerem & Vello Vensel, 2005. "Theory and Empirical Evidence of Business Support Networks," Working Papers 129, Tallinn School of Economics and Business Administration, Tallinn University of Technology.

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:rdp2003_021. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.