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Regulating Banks through Market Discipline: A Survey of the Issues
Author(s) -
De Ceuster Marc J. K.,
Masschelein Nancy
Publication year - 2003
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1046/j.1467-6419.2003.00212.x
Subject(s) - market discipline , sine qua non , order (exchange) , economics , market power , capital market , mechanism (biology) , financial market , finance , accounting , market economy , political science , law , philosophy , epistemology , monopoly
. The interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed New Capital Accord. This paper reviews the potential role market discipline can play in financial regulation. We start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms. Next, a definition of market discipline as a regulatory mechanism is advanced. We evaluate the disciplining power various market participants have. Finally, we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism. In this respect, the Basle Committee has taken the right approach.