Moderating Risk in New Zealand Retail Banks
29 Pages Posted: 25 Nov 2010
Date Written: November 24, 2010
The prudential regulation of banks in New Zealand relies heavily on the public disclosure of risk information. This work reports a significant relationship between deposit risk premiums and disclosure risk indicators, suggesting New Zealand’s disclosure regime is effective in moderating excessive risk-taking in banks. But, as the relationship is found to be strongest prior to publication, it cannot be attributed directly to market-discipline. Instead, it is suggested self-discipline, which is arguably more effective than either market or regulator discipline, is the driving force behind the bank risk-return relationship. This is not surprising as management, with ready access to timely and accurate information, is best placed to supervise and apply prompt corrective action. In New Zealand, bank directors are held personally liable for the accuracy of disclosure. While disclosure statements may not be widely read by depositors, it is likely they are scrutinized by competitors looking for any advantage. The finding that New Zealand’s disclosure regime is made effective by self-discipline is a significant and valuable contribution to the disclosure literature, especially in a time of financial turmoil when many are calling for greater official regulation and supervision of banks.
Keywords: Prudential regulation, bank disclosure, market discipline, self discipline, crisis
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation