Article
Bank asset allocation: the effectiveness of market monitoring
Abstract
Purpose – The purpose of this paper is to study the effectiveness of market discipline on banks’ risk-taking behavior based on how swiftly banks respond to market information.
Design/methodology/approach – A simplified incentive model provides the necessary justification for two types of market disciplines: first, monitoring by uninsured market participants, and second,
risk premium in terms of interest spread required by risk-averse depositors. Panel data regression is carried out for both surviving and failed US banks for the period 1999:Q4-2007:Q3 to examine the role of market discipline, bank capital, and macroeconomic shocks.
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