Market Discipline and Bank Risk Taking: Evidence from the East Asian Banking Sector

30 Pages Posted: 4 Apr 2017

See all articles by Fazelina Sahul Hamid

Fazelina Sahul Hamid

Universiti Sains Malaysia (USM)

Norhanishah Mohd Yunus

Universiti Sains Malaysia (USM)

Date Written: March 30, 2017

Abstract

The third pillar of the Basel II highlights the role of market discipline in easing the existing pressure on traditional monitoring measures like capital requirement and government supervision. This study test the effectiveness of market discipline in inducing prudential risk management practices among the East Asian banks over the 1995 to 2005 period. Market discipline is measured using information disclosure and interbank deposit holdings. We find that only the latter is an effective market discipline tool. However, the former becomes effective when market concentration is higher. We find that government owned, foreign owned and recapilatised banks are subject to market disciplining when disclosure in taken account but the opposite is true when interbank deposits is taken into account. Finally, we find that banks that disclose more risk related information hold more capital against their non-performing loan. The implications of the findings are discussed.

Keywords: Market Discipline, Bank Risk Taking, Information Disclosure, Panel Data, East Asian Banks

JEL Classification: G21, G28, N25

Suggested Citation

Hamid, Fazelina Sahul and Yunus, Norhanishah Mohd, Market Discipline and Bank Risk Taking: Evidence from the East Asian Banking Sector (March 30, 2017). East Asian Economic Review, Vol. 21, No. 1, p. 29-57, DOI/10.11644/KIEP.EAER.2017.21.1.322, March 2017, Available at SSRN: https://ssrn.com/abstract=2945792 or http://dx.doi.org/10.2139/ssrn.2945792

Fazelina Sahul Hamid (Contact Author)

Universiti Sains Malaysia (USM) ( email )

Jalan Sungai Dua
Minden, Penang 11800
Malaysia

Norhanishah Mohd Yunus

Universiti Sains Malaysia (USM) ( email )

Jalan Sungai Dua
Minden, Penang 11800
Malaysia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
106
Abstract Views
879
Rank
460,172
PlumX Metrics