An analysis of market-based banking regulation after the crisis: market discipline strikes back.

Summary The crisis of 2007-2008 can be interpreted as the failure of market discipline. External bailouts and unconventional monetary policies are signs of such failure. After the crisis, banking regulation has therefore undergone major changes. However, there is still a strong emphasis on market discipline. The purpose of this thesis is to study how market discipline has been reactivated in the recent period. The emphasis on transparency in financial reporting and the issue of internal bailouts are the two main avenues for the reactivation of market discipline. The first part of this thesis is thus devoted to an analysis of the relationship between financial disclosure, transparency and financial stability. In particular, we show that the relationship between these three terms is ambiguous, so that it is not possible to promote market discipline through disclosure requirements alone. In the second part of this thesis, we focus on the impact on bank behavior of the way financial information is produced, i.e. the impact of accounting standards. The third part of this thesis studies how market discipline could, or could not, be effectively implemented via regulatory requirements in terms of contingent convertible bonds (co-bonds). We show that the desire to reactivate market discipline through complex financial instruments such as CCOs is a dangerous oversight of history, as it was the complexity of finance that was at the origin of the crisis of the late 2000s.