Open AccessThe New Bail-in Regime and the Need for Stronger Market Discipline
Author(s) -
Evangelos Vasileiou
Publication year - 2014
Publication title -
international journal of finance and banking studies
Language(s) - English
Resource type - Journals
ISSN - 2147-4486
DOI - 10.20525/ijfbs.v3i1.171
Subject(s) - european union , market discipline , corporate governance , sovereignty , economics , order (exchange) , exaggeration , economic and monetary union , international economics , european debt crisis , government (linguistics) , legislation , debt , banking union , deposit insurance , financial system , macroeconomics , european integration , finance , political science , law , psychology , linguistics , philosophy , psychiatry , politics
Effective Market Discipline (MD) puzzles financial economists and regulators for decades, while the recent bail-in legislation for European banks extremely raises the need for even stronger MD. It may not be exaggeration to say that a new regime for the European banking market is born after the aforementioned decision. This paper’s objective is the broader MD examination, using variables that are not usually included in MD studies, but concern the European Union (EU) and the European Monetary Union (EMU) in the last years. In particular, apart from banking, deposit insurance and pure macroeconomic indicators, we also include governance and sovereign debt indices. The new regime may need a new MD approach. We choose Greece to implement our assumptions, because it is the country with the most severe economic, sovereign and governance problems in the EU. We employ data for the period 2002-10. The empirical evidence supports that market discipline is superficial, while there is ample evidence that MD is directly influenced by the poor governance performance and the excessive government debt. Greek authorities have to make major structural reforms in order to create the conditions for long-term stability, while our analysis points out some EMU’s shortfalls.