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Market Discipline and the Banking Industry

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Abstract

The presumption in most discussions of the Basel pillars is that in practice each will prove to reinforce the others. This chapter evaluates this official presumption. It provides a basic overview of the Basel guidelines regarding market discipline and related conceptual issues. It reviews alternative suggestions for contributing to improved bank safety and soundness via enhanced market discipline, including proposals mandating the issuance of subordinated debts. It discusses recent research that encompasses analysis of market discipline within a basic banking model and applies this model to an analysis of the relationship between bank market structure and market discipline. The chapter then considers what the literature tells us about the extent to which markets actually discipline banks and about interactions between market discipline and supervisory discipline applied by government regulators. The chapter concludes by evaluating the market discipline pillar in relation to the Basel capital-standards and supervisory-process pillars.

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    David VanHoose

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VanHoose, D. (2017). Market Discipline and the Banking Industry. In: The Industrial Organization of Banking. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-54326-9_8

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