Research Discussion Papers, Bank of Finland
No 21/2003:
The role of market discipline in handling problem banks
David T. Llewellyn and David G. Mayes ()
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.
Keywords: market discipline; banks; prompt corrective action; (follow links to similar papers)
38 pages, September 2, 2003
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