Scandinavian Working Papers in Economics
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Bank of Finland 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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