Bank Insolvency Procedures and Market Discipline in European Banking

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Bank Insolvency Procedures and Market Discipline in European Banking

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Title: Bank Insolvency Procedures and Market Discipline in European Banking
Author: Angkinand, Apanard; Wihlborg, Clas
Abstract: Market discipline in banking requires that explicit and implicit insurance schemes for financial sector firms are limited, and that the lack of insurance of important stakeholders is credible. This credibility cannot be achieved without transparent, predictable procedures for distress resolution for banks, including explicit rules for the liquidation of insolvent banks. We find that very few European countries have explicit procedures for dealing with problem banks. The propositions tested in this paper are that the credibility of non-insurance in European banking depends strongly on (i) the degree of coverage of deposit insurance schemes, and (2) on the existence of enforceable rules that enhance the credibility of non-insurance of groups of stakeholders.in bank. The proxy used for credibility of non-insurance in Europe is the probability of banking crisis. Finding a U-shaped relation between the probabiity of banking crisis and the coverage of explicit deposit insurance we derive the degree of coverage that minimizes the probability of crisis in Western and Eastern Europe. JEL Classification: G21; G28; F43 Keywords: Deposit Insurance; Banking Crisis; Insolvency Procedures, Market Discipline
URI: http://hdl.handle.net/10398/6798
Date: 2005-12-09

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