It has become increasingly evident in recent years that the safe
and the efficient operation of the banking system cannot be
guaranteed by Government regulation and supervisory review alone,
regardless of how conscientious the regulator, or well-intended the
regulations. Government regulation needs to be supplemented by
market discipline. Market discipline requires the existence of at
least some "de-facto at-risk" bank stakeholders, who have an
incentive both to monitor the financial performance of the banks
and to take action to influence bank management if they find
performance unsatisfactory. But the concept of market discipline in
banking was dormant for many years in the post-World War II era in
almost all countries, as the fear of major economic spillover
damage from bank failures led governments and regulators to either
not failing insolvent banks officially or protecting most or all
stakeholders, if they did place these banks in receivership. Only
recently has the concept of market discipline been resurrected in
banking. The 12 papers in this volume and eight commentaries on the
papers discuss whether the resurrection is worthwhile. They
consider the basic role of market discipline, how it may be applied
to banking and more broadly to large financial institutions of any
type, and the evidence of how well it has worked to date and the
promise it may have for the future. The authors and discussants
represent a wide array of both countries and affiliations -
academic and regulatory. Thus, the papers reflect a wide spectrum
of experience and thought.
General
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