Market Discipline and Bank Risk
Posted: 10 Aug 2012 Last revised: 1 Apr 2013
Date Written: August 9, 2012
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
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