Existence Of Market Discipline Research Articles

Policy uncertainty and bank’s funding costs: The effects of the financial crisis, Covid-19 pandemic, and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.

Evidence of Market Discipline Through Operational Risk Disclosures in Commercial Banking Sector of Pakistan

This study investigates the evidence of existence of market discipline through Operational risk disclosures under Basle Accord-II among commercial banks of Pakistan during years 2006 to 2014. Content Analysis of operational risk disclosure words is conducted to ascertain extent of market discipline. The findings indicate that the banks have growing awareness about operational risk and its disclosures. The results reveal that most of disclosures are narrative and of voluntary nature, showing existence of market discipline over study period. The results have given useful implications for risk managers to exploit risk information as risk management tool and for regulators as to how market discipline may be used in supervisory review.

Market discipline in the Latin American banking system: Testing depositor discipline, borrower discipline, and the internal capital market hypothesis

This paper tests the existence of market discipline in the Latin American banking system using a variety of methods. It re-examines traditional tests on depositor discipline, controlling banks’ internal capital demand. In addition, it explores whether borrowers discipline bank risk-taking. This new hypothesis points out that low-quality banks issue fewer loans and charge lower interests rates. Contrary to the general view, our findings suggest weak presence of market discipline. These results are robust to different indicators of the key explanatory variables and econometric methods. For policymakers, this implies a necessity to restore market discipline following the Basel Accord.

Performance of Market Discipline on the Islamic Financial Instrument: Evidence from Indonesian Islamic Gold Investment Scandal

Market discipline has been well recognized as effective means for preventing excessive business risk taking. Nevertheless, as the nature of investment in Islamic Finance may not meet the required characteristics, the ability of market discipline to work in its particular instrument market still needs to be proven. This study employed mixed method to answer the research questions. The quantitative analysis was carried out using event study approach, while in qualitative research we gathered qualitative information using questionnaire and Focus Group Discussion (FGD), as well as interviews. This study utilized data of daily prices of some financial instruments traded in Indonesia, including conventional stocks, syariah-compliant stocks, bond, sukuk, conventional mutual fund, syariah-compliant mutual fund, IHSG, and Jakarta Islamic Index (JII). We employed 7-day, 30-day, 60-day, and 90-day windows around the date of the Islamic gold investment Scandal revelation in 2013, in both conventional and Islamic Finance markets. The qualitative study involved individual respondents, people in the relevant supervisory agencies, academicians, and professionals working in financial institutions. We find that market discipline works well only in Sukuk market and only in shorter period. We also find that negative market actions in both capital market segments may obscure the existence of market discipline. The qualitative study results show that insufficient capability of investors for assessing the investment credibility explains the empirical findings.

BANKING MARKET DISCIPLINE IN INDONESIA AN EMPIRICAL TEST ON CONVENTIONAL AND ISLAMIC BANK

A sound banking system is vital in supporting a sound and strong economy. One of the important pillars of a sound banking system is market discipline, which is the reaction of the market makers on the risks taken by banks as a form of supervision and discipline. The objectives of this paper are to examine: (i) the existence of market discipline by depositors in the deposit insurance era by the Indonesia Deposit Insurance Corporation (LPS); (ii) the difference in market discipline by depositors before and after the policy of increasing the value of deposit covered; (iii) the difference between market discipline by depositors of Islamic banks with conventional banks. The data used are annually individual bank data from the Indonesian Banking Directory (DPI) in 2005-2009. The dependent variable is the change in deposits, which is used as proxy for market discipline in t period. The independent variables used are CAR, APB, NIM, and LDR as proxy of financial risk/fundamental condition of the bank in t-1 period. The result indicates the existence of market discipline in Indonesia and also shows that market discipline is detected stronger in the period 2005-2007 than the period 2008-2009. This study also indicates that market discipline by depositors of Islamic banks are stronger than those of conventional. Keywords: market discipline, deposit insurance, Islamic and conventional banks.

How Sensitive are Shareholders to Bank Risk?

We test for the existence of market discipline of banks by different types of shareholders. Shareholder discipline manifests itself in the form of monitoring the riskiness of banks as well as influencing the management actions of the banks to limit risk-taking. Shareholders utilize different types of risk measures to monitor bank risk taking. Shareholders influence bank management to improve capital adequacy and loan quality when they observe increasing riskiness. Owner-managers or large shareholders demonstrate significant influence on bank management. We also find that the influence on management in small banks by shareholders is more pronounced.