Market Discipline and Bank Risk

Posted: 10 Aug 2012 Last revised: 1 Apr 2013

See all articles by Mamiza Haq

Mamiza Haq

University of Queensland - Finance; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland; Bond University

Khoa T.A. Hoang

University of Queensland - Business School

Date Written: August 9, 2012

Abstract

This paper empirically examines the impact of market discipline on bank risk taking. Using a sample of 321 financial institutions from the Group of Seven nations (G7) comprising Canada, France, Germany, Italy, Japan, the UK, and the US, over the period 1996-2010, our findings suggest that market discipline helps reduce equity risk and credit risk of banks. We also find that the negative impact of market discipline on bank risk is stronger: in the presence of a risk-adjusted insurance premium, as bank capital increases and in the post-global financial crisis period. The results are robust to alternative estimation techniques.

Keywords: market discipline, bank risk, global financial crisis

JEL Classification: G21, G32

Suggested Citation

Haq, Mamiza and Faff, Robert W. and Hoang, Khoa T.A., Market Discipline and Bank Risk (August 9, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2126943 or http://dx.doi.org/10.2139/ssrn.2126943

Mamiza Haq

University of Queensland - Finance ( email )

Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Bond University ( email )

Gold Coast, QLD 4229
Australia

Khoa T.A. Hoang

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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