Constraint Mechanism In The Banking Market Study

The world has witnessed a series of banking crises over the last decade, which has had devastating impact on the financial system and the economy as a whole. As a result, the role of market discipline in the supervision of banks is being reconsidered in order to avoid or lessen the possibility of banking crises and their negative impact on the economy. Minimum capital requirement, official supervision and market discipline are put forward by the new Basel Accord as the three pillars of bank supervision.The market discipline of investors in China is weak due to the various reasons. Banks are held by the government so that restrictions on bank managers by stockholders are lessened; the number of subordinated debt issues is small and the liquidity of the debt market is weak so that bank creditors cannot supervise banks; the implicit deposit insurance provided by government credit decreased the degree of depositors' attention on bank risks. Under this situation, bank managers tend to simply consider profitability and ignore safety in asset management. The high risk level of banks not only aggravates the burden of the supervisory authorities but also exposes the whole financial system and the economy to systemic risks. In the face of the imminent open of China's financial system, the supervisory authorities are challenged with regard to measures to enhance bank market discipline and decrease bank risk. That is exactly the practical significance of writing this thesis.This thesis consists of 5 chapters.Chapter one expounds on the background and significance of writing this thesis and reviews the relevant literature, including the general theory of market discipline mechanism and summary of the theoretical and empirical studies on market discipline, and then explains the framework, research methods and innovations of this thesis.Chapter two discusses the operational mechanism of depositor market discipline, the reasons why it is weakened and the merits and defects of deposit insurance. Then this chapter analyses the impacts of various factors on depositor market discipline with the deposit interest model and deposit growth model, and verifies empirically the deposit interest model with U.S. bank statistics. Lastly, this chapter puts forward a tentative plan with regard to the design of deposit insurance according to a hypothetic model.Chapter three elaborates on the general theory, benefits and limits of subordinateddebt discipline, and then analyses theoretically the operation of subordinated debt discipline with a model by Levonian (2001). After that this chapter compares the empirical studies of subordinated debt discipline and puts forward a new plan for empirical study. In the last 2 parts of this chapter, the author compares the function and impact of equity and subordinated debt in market discipline as well as the various subordinated debt plans and the ways of issuing subordinated debt in U.S. and Europe.Chapter four analyses the perquisites and limits of market discipline, discusses the need to introduce official supervision and its problems, and compares the differences and links of market discipline and official supervision. The last part of this chapter discusses the tradeoff and choice between market discipline and official supervision with a model by Holmstrom and Tirole (1997).Chapter five analyses the current situation of market discipline in developing countries and the reasons behind, and points out ways to improve this situation. After introducing the successful experience of Argentina in enhancing market discipline, this chapter analyses the current situation in China and puts forward suggestions on how to improve market discipline in China.The innovations and major contributions of this thesis are as follows:1. Bank market discipline is a new subject, which has been studied by overseas scholars since the Basel Accord was signed. However, the past literature was merely focused on one aspect of market discipline or another, and did not make a comprehensive study. This thesis accommodates the various aspects of market discipline mechanism into one system and makes comprehensive theoretical and empirical studies on market discipline and analyses the relation and tradeoff between market discipline and official supervision.2. With regard to depositor market discipline, this thesis makes an empirical study on the correlation between deposit interest and bank risk level with data of the 10 largest U.S. banks and verifies the existence of depositor discipline in U.S., utilizing an equation put forward by the author based on previous empirical studies of other scholars.3. With regard to the market discipline mechanism in developing countries, this thesis compiles relevant statistical data, analyses the intensity of market discipline in developing countries using the private monitoring index, interprets the underlying causes and points out the weak aspects of developing countries in market discipline.4. With regard to the market discipline mechanism in China, this thesis studies empirically the correlation between the deposit growth rate and the risk level of 10 banks in China, and disproves the existence of depositor market discipline in China. After analyzing the reasons why market discipline by depositors and subordinated debt holders in China is weak, this thesis brings forward reform suggestions on how to enhance market discipline in China.