The Rationale for a More Market-based Regime

In this and the following chapter we explore the possibilities for introducing a more market-based regime for financial supervision. This analysis will be based primarily on an appraisal of the characteristics of the best-known example of such a regime that is currently operating — namely, that in New Zealand. The key feature of our proposals is that we advocate a rather more comprehensive approach to exposing banks to market pressures in order to improve their prudential behaviour than has typically been the case in the existing literature. There the focus has been on trying to ensure that banks have to raise at least some of their capital from the market on a continuing basis. As mentioned earlier, Calomiris (1999), for example, suggests that every bank should have to raise at least 2% of their risky assets in the form of uninsured subordinated debt. This debt would have a two-year maturity and 1/24 of it would mature each month. In that way banks would continually have to face the market, whatever their corporate structures.1 We noted in the previous chapter that one of the major problems in some banking crises came from banks — particularly small banks with a mutual element to their corporate structures — that were largely rather immune to market pressures.