Market discipline and bank risk taking

Khoa TA Hoang, Robert Faff and Mamiza Haq

Australian Journal of Management, 2014, vol. 39, issue 3, 327-350

Abstract: This paper explores the impact of market discipline on bank risk taking. We examine a broad sample of financial institutions from the G7 nations over the period 1996–2010. We apply System Generalized Method of Moments estimation to control for endogeneity and other unobserved heterogeneity in a dynamic panel setting. Our analysis suggests that market discipline helps reduce bank risk (both equity and credit risk). Moreover, we find that this negative impact of market discipline is stronger: (a) in the presence of a risk-adjusted insurance premium; and (b) during the post-global financial crisis period. However, the disciplinary effect of market discipline is not enhanced in the presence of bank capital. We highlight the policy implications of these findings.

Keywords: Bank risk; global financial crisis; market discipline (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:39:y:2014:i:3:p:327-350

DOI: 10.1177/0312896213496800

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