Bank Market Discipline
Reint E. Gropp, M. Schleicher
ECB Monthly Bulletin,
2005
Abstract
This article reviews the conceptual issues surrounding market discipline for banks and describes to what extent market discipline could complement supervisory activities. The potential of market discipline has been explicitly recognised in the New Basel Accord. In addition to capital requirements (Pillar I) and supervisory review (Pillar II), the Accord provides for a greater role of financial markets in complementing traditional supervisory activities by asking banks for increased transparency with regard to their operations (Pillar III). This article puts Pillar III in the broader context of direct and indirect market discipline. It is argued that both direct and indirect market discipline should be enhanced by the transparency requirements of the New Capital Accord, but that other conditions may also need to be met in order for market discipline to become more effective. Nevertheless, the article also shows that aggregated market prices can play a useful role in monitoring banking sector stability.
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Recent Developments and Risks in the Euro Area Banking Sector
Reint E. Gropp, Jukka M. Vesala
ECB Monthly Bulletin,
2002
Abstract
This article provides an overview of euro area banks’ exposure to risk and examines the effects of the cyclical downturn in 2001. It describes the extent to which euro area banks’ risk profile has changed as a result of recent structural developments, such as an increase in investment banking, mergers, securitisation and more sophisticated risk management techniques. The article stresses that the environment in which banks operated in 2001 was fairly complex due to the relatively weak economic performance of all major economies as well as the events of 11 September in the United States. It evaluates the effects of these adverse circumstances on banks’ stability and overall performance. The article provides bank balance sheet information as well as financial market prices, arguing that the latter may be useful when assessing the soundness of the banking sector in a forward-looking manner. It concludes with a review of the overall stability of euro area banks, pointing to robustness in the face of the adverse developments in 2001 and the somewhat improved forward-looking indicators of banks’ financial strength in early 2002.
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