Research Discussion Papers, Bank of Finland
No 18/1997:
A Market Based Approach to Maintaining Systemic Stability. Experiences from New ZealandA Market Based Approach to Maintaining Systemic Stability. Experiences from New Zealand
David Mayes
Abstract: As a response to the concerns over the scale of banking
failures in several OECD countries over the last decade, this paper
explores the advantages of the new market disclosure regime that was
implemented in New Zealand in 1996. It finds that, although New Zealand has
many special features which make the new regime particularly suitable
there, all the main principles can be applied elsewhere in the OECD, even
in the context of current EU legislation. These include: ensuring quality
of corporate governance of those financial institutions wishing to be
registered as banks, with high accounting and independent auditing
standards; public disclosure of substantial information about the risks
individual banks face so that market disciplines can be applied - including
extending Value at Risk measurement to the whole of the banks' activities;
placing the responsibility of the prudential operation of each bank on its
directors and management, with penalties and financial liability for false
statements; avoiding putting taxpayer funds at risk, by making it clear
that no bank is too big to fail and focusing the role of supervisors on
ensuring that they have the power to step in and prevent adverse
consequences to the system as a whole when a bank gets into difficulty. By
these means, the moral hazard inherent in bank supervision and the costs of
supervision can be significantly reduced.
Keywords: banking supervision; market discipline; systemic stability; (follow links to similar papers)
49 pages, November 26, 1997
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