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The role of market discipline in handling problem banks

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  • Llewellyn, David T.
  • Mayes, David G.

Abstract

This paper considers the conditions that are necessary for market discipline to complement prompt corrective action (PCA) by the authorities in handling problem banks.We initially consider precisely what market discipline means in this context, who exercises it and the preconditions that are necessary for it to operate effectively.We explore the incentives that are necessary for PCA and market discipline to reinforce rather than cancel each other and in particular consider the limits to market discipline in this context from corporate governance and from difficulties in valuation.While our analysis is primarily aimed at advanced countries, we also examine problems in emerging markets and how deposit insurance arrangements might conflict with the aims of both PCA and market discipline.

Suggested Citation

  • Llewellyn, David T. & Mayes, David G., 2003. "The role of market discipline in handling problem banks," Bank of Finland Research Discussion Papers 21/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_021
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    References listed on IDEAS

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    9. David Llewellyn, 2000. "Some Lessons for Regulation from Recent Bank Crises," Open Economies Review, Springer, vol. 11(1), pages 69-109, August.
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    19. Robert A. Eisenbeis & Larry D. Wall, 2002. "The major supervisory initiatives post-FDICIA: Are they based on the goals of PCA? Should they be?," FRB Atlanta Working Paper 2002-31, Federal Reserve Bank of Atlanta.
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    21. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper Series WP-00-7, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Spyros G.Stavrinakis & Christian Harm & David T. Llewellyn & Bridget Gandy & Peter Shaw & Peter Tebbutt & Mark Young, 2007. "Corporate Governance in Financial Institutions," SUERF Studies, SUERF - The European Money and Finance Forum, number 2007/3 edited by Morten Balling, May.
    2. Mayes, David G. & Nieto, María J. & Wall, Larry, 2007. "Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution," Bank of Finland Research Discussion Papers 7/2007, Bank of Finland.
    3. Mayes, David G. & Nieto, María J. & Wall, Larry, 2008. "Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution?," Journal of Financial Stability, Elsevier, vol. 4(3), pages 232-257, September.
    4. Holopainen, Helena, 2007. "Integration of financial supervision," Bank of Finland Research Discussion Papers 12/2007, Bank of Finland.
    5. David G. Mayes, 2011. "Early Intervention and Prompt Corrective Action in Europe," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 10, Edward Elgar Publishing.
    6. repec:zbw:bofrdp:2009_017 is not listed on IDEAS
    7. repec:zbw:bofrdp:2007_007 is not listed on IDEAS
    8. David G. Mayes, 2011. "Early Intervention and Prompt Corrective Action in Europe," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 10, Edward Elgar Publishing.
    9. Saheruddin, Herman & Soedarmono, Wahyoe, 2022. "Do board size, institutional ownership and external auditors matter to market discipline in Indonesian banking?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 389-395.
    10. Mayes, David G. & Nieto, Maria J. & Wall, Larry, 2007. "Multiple safety net regulators and agency problems in the EU : is Prompt Corrective Action a partial solution," Research Discussion Papers 7/2007, Bank of Finland.

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