| The ability of market forces to supervise banking firms has become an important policy problem as banking firms evolve within increasingly global financial markets. The Basel Committee has expressed growing interest in the use of market-related to supplement their traditional methods of supervising banking firms. In 2001 according to the comment of The New Basel Capital Accord, The Committee has put forward that minimum capital standards (Pillar 1) and the supervisory review process (Pillar 2) and market discipline(pillar 3) can promote safety and soundness in banks and financial systems. Market discipline imposes strong incentives on banks to conduct their business in a safe, sound and efficient manner, including an incentive to maintain a strong capital base as a cushion against potential future losses arising from risk exposures. So it is crucial to the safety of bank systems.In the first chapter, the paper gives a definition of the market discipline. Market discipline is a process in which the creditors and owners of a bank or other related-beneficiaries will transfer their deposits from an unsound bank to a sound bank or sell their owned equity of unsound bank based on the information disclosure from the bank, the account office, the law office and the credit agencies etc. By doing so, the bank will be forced to run soundly, or it will be drop out of the market. The traditional government supervision shows serious flaws in that its strict and overall regulations subdue the development of banks and this leads to the emergence of market discipline.In the second chapter, the paper elaborates on the content of market discipline. First, some preconditions must be met to maximumize the effect of market discipline, including perfect information disclosure, limited safety net, the strict market-dropout policy and good banking environment, etc. Of course, sound macroeconomic circumstance is the first premise of efficient market discipline to achieves its goals by means of actions form a single bank. If the bank system encounters problems, the function of market discipline will fall into trouble. Not surprisingly, as for the government supervision and market discipline, each type of supervision has some comparative advantages, thus it is difficult to choose one system over the other on the basis of the theory alone. Government agents probably have a cost advantage over multiple private analysts, and their access to inside information about firm condition may be superior for two reasons: examiners can force managers to reveal information, and a single government agency does not suffer from free-rider problems associated with many fragmented stakeholders. These government advantages may be partially offset by government constraints which make it difficult to pay competitive market wages. In addition, regulator's incentives to identify and remedy problems promptly have been questioned. When it comes to the discipline of banks, government agents operate under rigid procedural constraints designed to ensure that all regulated institutions are treated fairly. These procedures often slow the imposition of corrective measures, even when problems have been accurately identified. By the contrary, the market is not expected to be fair treated-at least not to the same extent. Market disciplinary forces can therefore take effect rapidly, only if the government safety net does not mute market incentives to act quickly when a problem is first recognized.In the third chapter, the paper discusses the practice of market discipline in NEW ZEALAND and this progress of it promoted by The Basel Committee. The Basel Committee is the most important force to encourage market discipline. In Core Principles for Effective Banking Supervision(SEP,1997), it is pointed out that effective market discipline is the preconditions for effective banking supervision. An effective system of banking supervision will assign clear responsibilities and objectives to each agency involved in the supervision of banking organizations. Each su... |
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