Doctoral thesis

Market discipline in banking regulation : theory and evidence from Switzerland


130 p

Thèse de doctorat: Università della Svizzera italiana, 2007 (jury note: summa cum laude)

English In Switzerland, relatively little effort has been put into assessing the role and potential of market information and market discipline in banking regulation and supervision. This thesis represents the first attempt to address the issue in a comprehensive way. The first two papers explore to what degree the market disciplines Swiss banks, both directly and indirectly. The empirical results provide evidence for the existence of direct market discipline in the Swiss banking sector, but not for banks that benefit from a state guarantee. At the same time, market data do not appear to provide the Swiss supervisor with additional information. Thus, the prospects for indirect market discipline are less promising. In order to avoid regulatory forbearance, some economists suggest that supervisors should use market data as triggers for prompt corrective actions. The third paper examines the informational implications of such a proposal. The paper shows that the supervisor should be very careful in using market signals as triggers for prompt corrective actions, as tying intervention to market prices may distort their informational content and hence lead to inefficient actions.
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