Rethinking Market Discipline in Banking : Lessons from the Financial Crisis

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.

Bibliographic Details

Main Author:	Stephanou, Constantinos
Language:	English
Published:	2010-03-01
Subjects:	ACCOUNTING, ACCOUNTING RULES, ACCOUNTING STANDARDS, AGENCY PROBLEMS, AMOUNT OF DEBT, AMOUNT OF RISK, ASYMMETRIC INFORMATION, AUDITORS, BALANCE SHEET, BANK BEHAVIOR, BANK EXPOSURES, BANK FAILURE, BANK FOR INTERNATIONAL SETTLEMENTS, BANK HOLDING, BANK HOLDING COMPANIES, BANK LENDING, BANK MANAGEMENT, BANK POLICY, BANK PROFITS, BANK REGULATION, BANK SECURITIES, BANK SECURITY, BANK SUPERVISORS, BANKING CRISIS, BANKING REGULATION, BANKING SECTOR, BANKING SUPERVISION, BANKING SYSTEM, BANKRUPTCY, BANKS, BASIS POINTS, BOARDS OF DIRECTORS, BOND YIELD, BONDS, CAPITAL ACCORD, CAPITAL MARKETS, CAPITAL REQUIREMENTS, CAPITAL STANDARDS, CAPITAL STRUCTURE, CDS, CHECKS, CLASS ACTION, COMMERCIAL BANKS, COMMON SHARES, COMMON STOCK, CONFLICTS OF INTEREST, CONSOLIDATION, CONTINGENCY PLANS, CONTRACT ENFORCEMENT, CONVERTIBLE DEBENTURES, CORPORATE FINANCE, CORPORATE GOVERNANCE, COUPON, COUPON RATE, CREDIT DEFAULT, CREDIT DEFAULT SWAPS, CREDIT RATING, CREDIT RATING AGENCIES, CREDIT RATINGS, CREDIT RISK, CREDITORS, DEBT INSTRUMENT, DEBT ISSUANCE, DEBT PRICE, DEBT PRICES, DEPOSIT, DEPOSIT INSURANCE, DEPOSIT INSURANCE COVERAGE, DEPOSIT INSURANCE SCHEMES, DEPOSITOR, DEPOSITORS, DEPOSITS, DERIVATIVES, DEVELOPING COUNTRIES, DEVELOPMENT BANK, DISCLOSURE REQUIREMENTS, DIVIDEND, EFFICIENT MARKET, EFFICIENT MARKETS, EMERGING ECONOMIES, EQUITIES, EQUITY HOLDINGS, EQUITY INDEX, EQUITY MARKET, EQUITY PRICES, EXPOSURE, EXTERNAL MARKET, EXTERNALITIES, FACE VALUE, FAIR, FAIR VALUE, FEDERAL RESERVE, FEDERAL RESERVE SYSTEM, FINANCIAL ACCOUNTING, FINANCIAL CRISIS, FINANCIAL DEREGULATION, FINANCIAL INSTITUTIONS, FINANCIAL INSTRUMENTS, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL PERFORMANCE, FINANCIAL REGULATION, FINANCIAL SECTOR, FINANCIAL SERVICES, FINANCIAL STABILITY, FINANCIAL STRENGTH, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, GAMBLING, GLOBAL BANKING, GLOBALIZATION, GOOD GOVERNANCE, GOVERNANCE PRACTICES, GOVERNMENT INTERVENTION, GOVERNMENT SUPPORT, HEDGE FUNDS, HOSTILE TAKEOVERS, HYBRID SECURITIES, ILLIQUIDITY, INDIVIDUAL MARKET, INFORMATION ASYMMETRIES, INFORMATION DISCLOSURE, INFORMATION DISCLOSURES, INFORMATIONAL ASYMMETRIES, INSTITUTIONAL ENVIRONMENTS, INSTITUTIONAL INVESTORS, INSTRUMENT, INSURANCE, INSURANCE COMPANIES, INTERNATIONAL ACCOUNTING STANDARDS, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INVESTMENT BANK, INVESTMENT BANKS, INVESTOR PROTECTION, JUNK BOND, LACK OF TRANSPARENCY, LEGAL PROTECTION, LENDER, LEVEL OF RISK, LEVY, LIABILITY, LIMITED LIABILITY, LIQUID MARKETS, LOAN, MACROECONOMIC ENVIRONMENT, MACROECONOMIC POLICIES, MANDATES, MARKET BENCHMARK, MARKET BENCHMARKS, MARKET DISCIPLINE, MARKET INFORMATION, MARKET PARTICIPANTS, MARKET PLAYERS, MARKET PRICES, MARKET PRICING, MARKET REGULATION, MARKET RISK, MARKET THEORY, MATURITY, MORAL HAZARD, MORTGAGE, NARROW BANKING, POLICY RESPONSES, POLITICAL CONSIDERATIONS, PREFERENTIAL ACCESS, PRICE BEHAVIOR, PRICE INDEX, PRICE MOVEMENTS, PRICE SENSITIVITY, PRIMARY MARKET, PRINCIPAL-AGENT PROBLEMS, PRIVATE BANK, PRIVATE PROPERTY, PRIVATE SECTOR DEVELOPMENT, PROPERTY RIGHTS, PRUDENTIAL REGULATION, PRUDENTIAL STANDARDS, PUBLIC POLICY, RATING AGENCIES, REGULATORS, REGULATORY AUTHORITIES, REGULATORY CAPITAL, REGULATORY FRAMEWORKS, REGULATORY REPORTS, REGULATORY RESTRICTIONS, REGULATORY STANDARDS, RETAIL, RETURN, RISK ASSESSMENT PROCESSES, RISK EXPOSURES, RISK MANAGEMENT, RISK MANAGEMENT SYSTEMS, RISK MANAGERS, RISK OF DEFAULT, RISK PROFILE, SAFETY NET, SAFETY NETS, SECONDARY MARKET, SECURITIES, SECURITY PRICES, SHARE PRICE, SHAREHOLDERS, SHORT-TERM REPOS, SHORT-TERM YIELD, SOLVENCY, SPREAD, STATISTICAL ANALYSIS, STOCK PRICE, SUBORDINATED DEBT, SUPERVISORY AUTHORITIES, SYSTEMIC RISK, SYSTEMIC RISKS, TIER 1 CAPITAL, TRADING, TRANSPARENCY, TREASURY, TYPES OF INSTRUMENTS, UNSECURED DEBT, VOLATILITY, WORKING CAPITAL,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100303081544 https://hdl.handle.net/10986/3717
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