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Direct Market Discipline: An Incentive Model of the Banking Firm
[Le canal direct de la discipline de marché : un modèle d’incitation]

Author

Listed:
  • Adrian Pop

    (Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université)

Abstract

A straightforward method to enhance market discipline in banking, as it has been discussed in the US since the early 80s, is the Mandatory Sub-debt Policy. This policy proposal suggests a modus operandi of market discipline based on two main channels. First, a direct channel, activated via the cost of issuing sub-debt securities, which theoretically should be sensitive to the bank risk profile. Second, an indirect channel, effective so long as the supervisor imposes constraints on bank behavior in function of the prices formed in the secondary sub-debt market. The article proposes an illustration of the direct channel transmission mechanism based on a simple incentive model of the banking firm.

Suggested Citation

  • Adrian Pop, 2005. "Direct Market Discipline: An Incentive Model of the Banking Firm [Le canal direct de la discipline de marché : un modèle d’incitation]," Post-Print hal-04212782, HAL.
    • Handle: RePEc:hal:journl:hal-04212782
    as

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