It has become increasingly evident in recent years that the safe and the efficient operation of the banking system cannot be guaranteed by Government regulation and supervisory review alone, regardless of how conscientious the regulator, or well-intended the regulations. Government regulation needs to be supplemented by market discipline. Market discipline requires the existence of at least some "de-facto at-risk" bank stakeholders, who have an incentive both to monitor the financial performance of the banks and to take action to influence bank management if they find performance unsatisfactory. But the concept of market discipline in banking was dormant for many years in the post-World War II era in almost all countries, as the fear of major economic spillover damage from bank failures led governments and regulators to either not failing insolvent banks officially or protecting most or all stakeholders, if they did place these banks in receivership.Only recently has the concept of market discipline been resurrected in banking. The 12 papers in this volume and eight commentaries on the papers discuss whether the resurrection is worthwhile.They consider the basic role of market discipline, how it may be applied to banking and more broadly to large financial institutions of any type, and the evidence of how well it has worked to date and the promise it may have for the future. The authors and discussants represent a wide array of both countries and affiliations - academic and regulatory. Thus, the papers reflect a wide spectrum of experience and thought.
...Twelve papers consider the resurrection of the concept of market discipline in banking, how well market discipline has worked in the past, and the promise it may have for the future. Individual papers were presented during the annual meeting of the Financial Management Association International in Dublin, Ireland, in June 2003 or during the annual meeting of the Western Finance association in Vancouver, Canada, in July 2003. Journal of Economic Literature, 2004
List of contributors. Introduction (G.G. Kaufman). Part I. Market discipline in banking: Theory and evidence 1. Resolving large complex financial organizations (R. Bliss). The impact of supervisory disclosure on the supervisory process (R. Feldman, et al.). Market discipline: A theoretical framework for regulatory policy development (P. Hamalainen, et al.). International financial conglomerate and bank insolvency regimes (R. Herring). Comment (J. Bisignano). Comment (B.E. Gup). Comment (G.G. Kaufman). Comment (H. Rosenblum). Part II. Market discipline in banking: Theory and evidence 2. Market discipline and financial crisis policy: A historical perspective (M.D. Bordo). The role of market discipline in handling problem banks (D.T. Llewellyn, D.G. Mayes). Do un-insured depositors vote with their feet? (K. McDill, A.M. Maechler). Market discipline of Fannie Mae and Freddie Mac: How do share prices and debt yield spreads, respond to new info? (R.S. Seiler, Jr.). Comment (L. Mote). Comment (R. van Order). Part III. Market discipline in banking: Role of supervisors and netting. Netting, financial contracts, and banks: The economic implications (B.Bergman, et al.). Inter-bank netting agreements and the distribution of bank default risk (W.R. Emmons). Do jumbo-cd holders care about anything? (J.R. Hall, et al.). Bank loan underwriting practices: Can supervisors' risk assessments, contribute to early warning systems? (C. Richardson, et al.). Comment (D. Evanoff). Comment (J.E McNulty).