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The Quality of Private Monitoring in European Banking: Completing the Picture

Author

Listed:
  • Adrian Pop

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

  • Diana Pop

    (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)

Abstract

The philosophy behind the debt market discipline approach to banking regulation presumes that the pricing of bank debt securities, if accurate, conveys reliable signals to supervisors. In this paper, we take a critical look at the feasibility of such an approach by exploring empirically the possibility that markets may price differently the risk profile of bank issuers along the empirical distribution of credit spread. The paper proposes a quantile regression framework to draw novel inferences about the functioning of market discipline and the quality of private monitoring in European banking and provides a more comprehensive picture of the distribution of spreads conditional on its main explanatory factors. We find that the spread-risk relationship is systematically steeper and more significant at the "right-tail" of the conditional distribution of credit spread, which suggests that the market is somewhat tougher with "high-risk" banks.

Suggested Citation

  • Adrian Pop & Diana Pop, 2012. "The Quality of Private Monitoring in European Banking: Completing the Picture," Working Papers hal-00678943, HAL.
    • Handle: RePEc:hal:wpaper:hal-00678943
    Note: View the original document on HAL open archive server: https://hal.science/hal-00678943
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    Cited by:

    1. Cécile Casteuble & Emmanuelle Nys & Philippe Rous, 2013. "Bank Risk - Return Efficiency and Bond Spread: Is There Evidence of Market Discipline in Europe," Working Papers hal-00916717, HAL.

    More about this item

    Keywords

    Banking regulation and supervision; Market discipline; Subordinated debt; Private monitoring; Credit spreads; Quantile regression;
    All these keywords.

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