Bank management and market discipline

Yoram Landskroner, Jacob Paroush

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

In recent years, market discipline has attracted interest as a mechanism to augment or replace government regulation of the financial sector and, especially, depository institutions. The ability to substitute market discipline for bank regulation is of much interest and we use a theoretical model to examine it. In a stylized comprehensive model, we incorporate the characteristics of the regulatory structure and examine the effects of different parameters on the optimal decisions of the bank. These parameters include changes in risk, deposit-insurance coverage, and degree of market discipline. Interesting results include the following: (1) an increase in competition should result in less equity financing, higher deposit interest rates, and higher risk premiums (spreads); (2) exogenous shocks, such as an increase in oil prices, will result in more equity financing; (3) the sensitivity of the two types of deposits will react to a change in market discipline in opposite ways. Our theoretical results are consistent with empirical evidence in recent studies.

Original languageEnglish
Pages (from-to)395-414
Number of pages20
JournalJournal of Economics and Business
Volume60
Issue number5
DOIs
StatePublished - 2008

Bibliographical note

Funding Information:
We would like to thank the late Larry Goldberg, Alon Raviv, Paul Wachtel, and two anonymous referees for their helpful comments. Yoram Landskroner would like to thank the Krueger Foundation of the Hebrew University for financial support.

Funding

We would like to thank the late Larry Goldberg, Alon Raviv, Paul Wachtel, and two anonymous referees for their helpful comments. Yoram Landskroner would like to thank the Krueger Foundation of the Hebrew University for financial support.

FundersFunder number
Krueger Foundation of the Hebrew University

    Keywords

    • Asset-liability management (ALM)
    • Bank failure
    • Competition
    • Deposit insurance
    • Deposits
    • Equity financing
    • Market discipline
    • Spreads

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