Market discipline and bank risk control: analysis of the conditions for effectiveness.

Summary The objective of this thesis is to analyze the conditions that must be met in order to implement market discipline in the banking sector. In chapter 1, we analyze the modalities of use and the conditions of effectiveness of a market discipline. We study the incentives and capacities of agents to evaluate the risk of banks before presenting the obstacles to the effectiveness of a discipline linked to the specificity of the banking activity. In Chapter 2, using theoretical modeling, we analyze the effects on bank risk of����a subordinated debt policy by considering the incentives and capabilities of subordinated debt holders to assess risk. We highlight that better risk control can be achieved through direct market influence if subordinated debt holders have sufficient information about risk and are credibly removed from any insurance. The use of market information by supervisors can complement the beneficial effects of direct discipline and, in some cases, counteract its perverse effects when its conditions for effectiveness are not met. In chapter 3, we test the contribution of equity market indicators in predicting financial deterioration in banks. We show that the market indicators contain information not contained in the accounting indicators and that this information can be used effectively between the dates of the balance sheets. However, this result is valid only for banks with sufficiently marketed liabilities.