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Potential Insolvency, Market Efficiency, and Bank Regulation of Large Commercial Banks

Published online by Cambridge University Press:  06 April 2009

Richard H. Pettway
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Extract

Bank regulators tend to disagree with the idea that markets can play a role in bank regulation. The markets for bank securities are viewed by regulators as inefficient and lacking the necessary information to demand sufficient risk premiums on bank obligations to affect bank management decisions. On the other hand, bankers who have an active market for their securities tend to place faith in market assessments to determine the cost of management policies; therefore, they tend to think that the market plays an important role in “regulating” bank management decisions. The regulators are perhaps correct about the markets for small and medium–sized banks, but for those banks which have an active market for their securities, do investors adjust rates of return for the presence of increased potential of bankruptcy? If so, when does the adjustment take place?

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 1 , March 1980 , pp. 219 - 236
Copyright
Copyright © School of Business Administration, University of Washington 1980

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References

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