Market Discipline in Regulation: Pre- and Post-Crisis

Forthcoming, Oxford Handbook of Banking 3e, 2019

51 Pages Posted: 24 Oct 2018

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Robert R. Bliss

Wake Forest University - Schools of Business

Date Written: October 22, 2018

Abstract

With the introduction of Basel II in 2004, “market discipline” became one of the Basel Committee’s three pillars of prudential regulation. Although many academic papers have sought to test for the presence of effective market discipline in banking, few have dealt fully with the question. Effective market discipline involves two distinct steps: monitoring a bank’s condition and influencing it to avoid unacceptably large risks. Both phases of market discipline are necessary; neither alone is sufficient. In this chapter, we provide a careful definition of market discipline, explain how it may complement supervisory efforts to control an institution’s risk-taking, and review the available literature on the efficacy of market discipline. We also discuss how recent changes in supervisory actions toward failing banks has changed the channels through which market discipline will work going forward.

Keywords: market discipline, financial regulation, bank failure resolution, Dodd-Frank, Bank Recovery and Resolution Directive, Total Loss Absorbing Capacity

JEL Classification: E58, E61, G28

Suggested Citation

Flannery, Mark Jeffrey and Bliss, Robert R., Market Discipline in Regulation: Pre- and Post-Crisis (October 22, 2018). Forthcoming, Oxford Handbook of Banking 3e, 2019 . Available at SSRN: https://ssrn.com/abstract=3272360

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Robert R. Bliss

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

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