The New Bail-in Regime and the Need for Stronger Market Discipline:What Can We Learn From the Greek Case?

Vasileiou Evangelos
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Vasileiou Evangelos: Department of Business Administration, University of the Aegean, Chios, Greece

International Journal of Finance & Banking Studies, 2014, vol. 3, issue 1, 85-113

Abstract: Effective Market Discipline (MD)has been puzzlingfinancial economistsand regulatorsfor decades, while the recent bail-in legislation forEuropean banks strongly increases the need for even stricterMD. It may not beanexaggerationwhen wesay that a new regime for theEuropean banking market has been createdafter the aforementioned decision. This paper’s objective is the broaderexaminationof MD, using variables that are not usually included in MD studies, but concern the European Union(EU) and the European Monetary Union (EMU)in the past fewyears. In particular, apart from banking, deposit insurance and pure macroeconomic indicators, we also include governanceand sovereign debt indices. The new regime may needa new MD approach. Wechoose Greece to implement our assumptions, because it is the country with the most severe economic, sovereign and governanceproblemsin 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 of the EMU’s shortfalls.

Keywords: market discipline; deposit insurance; governance indicators; sovereign debtcrisis; Greece; European Monetary Union (search for similar items in EconPapers)
Date: 2014
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