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Using Price Information as an Instrument of Market Discipline in Regulating Bank Risk

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Lehar_Using_Price2011_conference.pdf (385.3Kb)
Author
Lehar, Alfred
Seppi, Duane
Strobl, Gunter
Accessioned
2011-01-26T20:47:39Z
Available
2011-01-26T20:47:39Z
Issued
2011-01-26T20:47:39Z
Type
conference proceedings
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Abstract
An important trend in bank regulation is greater reliance on market discipline. In particular, information impounded in securities prices is increasingly used to complement supervisory activities of regulators with limited resources. The goal of this paper is to analyze the theoretical foundations of market-based bank regulation. We nd that price information only improves the e ciency of the regulator's monitoring function if the banks' risk-shifting incentives are not too large. Further, if the regulator cannot commit to an ex ante suboptimal auditing policy, market-based bank regulation can lead to more risk taking in equilibrium, increasing the expected payments by the deposit insurance agency. Finally, we show that the regulatory use of market information can decrease the investors' incentives to acquire costly information, thereby reducing the informativeness of stock prices.
Refereed
No
Presented at the Symposium on the Risk of Financial institutions, at Simon Fraser University on April 30, 2010.
 
Corporate
University of Calgary
Faculty
Haskayne School of Business
Doi
http://dx.doi.org/10.11575/PRISM/28783
Uri
http://hdl.handle.net/1880/48393
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  • Haskayne School of Business Research & Publications

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