Market Discipline and Bank Risk Taking

Posted: 20 Aug 2014

See all articles by Robert W. Faff

Robert W. Faff

University of Queensland

Mamiza Haq

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

Khoa T.A. Hoang

University of Queensland - Business School

Date Written: August 18, 2014

Abstract

This paper explores the impact of market discipline on bank risk taking. We examine a broad sample of financial institutions from the G7 nations over the period 1996-2010. We apply System Generalized Method of Moments estimation to control for endogeneity and other unobserved heterogeneity in a dynamic panel setting. Our analysis suggests that market discipline helps reduce bank risk (both equity and credit risk). Moreover, we find that this negative impact of market discipline is stronger: (a) in the presence of a risk-adjusted insurance premium; and (b) during the post-global financial crisis period. However, the disciplinary effect of market discipline is not enhanced in the presence of bank capital. We highlight the policy implications of these findings.

Keywords: bank risk, global financial crisis, market discipline

Suggested Citation

Faff, Robert W. and Haq, Mamiza and Hoang, Khoa T.A., Market Discipline and Bank Risk Taking (August 18, 2014). Australian Journal of Management, Vol. 39, 2014. Available at SSRN: https://ssrn.com/abstract=2482379

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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

Khoa T.A. Hoang

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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