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Bank Supervision after the Financial Crisis: Signals from the Market for Liquidity

Nyborg, Kjell G.
Working paper
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URI
http://hdl.handle.net/11250/281466
Date
2015-04-10
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  • Discussion papers (FOR) [509]
Abstract
The financial turmoil that we have been living with since August 2007 has left central

banks, regulators, politicians, and economists with two big, overriding questions: How do

we best get out of the crisis and how should banks be regulated and markets organized to

avoid such crises in the future. This paper deals with the second question. Specifically,

the paper deals with the third pillar of Bank supervision under Basel II, namely market

discipline. The idea of this pillar, as summarized by Emmons, Gilbert, and Vaughan

(2001), is for supervisors and regulators to make use of information about the financial

health of banks that is contained in securities prices. In particular, as explained by

Emmons et al: “The recent market discipline discussion centers on proposals to require

some banks to issue a standardized form of subordinated debt.” Flannery (1998)

discusses this more broadly and reviews the evidence on the effectiveness of using

market information in prudential supervision. My proposal here is that the market

discipline approach could usefully look for information about banks’ financial health

outside of the securities markets.
Publisher
FOR
Series
Discussion paper;14/15

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