Did the market signal impending problems at Northern Rock? An analysis of four financial instruments
Paul Hamalainen
Adrian Pop
Maximilian Hall
Barry Howcroft
2134/4203
https://repository.lboro.ac.uk/articles/preprint/Did_the_market_signal_impending_problems_at_Northern_Rock_An_analysis_of_four_financial_instruments/9492875
The academic literature has regularly argued that market discipline can support regulatory authority discipline to monitor banking sector stability. This includes, amongst other things, using forward-looking market prices to identify those credit institutions that are most at risk of failure. The paper’s key aim is to analyse whether market investors signalled potential problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities at the Bank of England in September 2007. A further aim of the paper is to examine the signalling qualities of four financial market instruments so as to explore both the relative and individual qualities of each. Therefore, the paper’s findings contribute to the market discipline literature on using market data to identify bank risk-taking and enhancing supervisory monitoring. In addition, the paper tests for evidence of an implicit “too-big-to-fail” policy in UK banking. Our analysis suggests that private market participants did signal impending financial problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities. These findings lend some empirical support to proposals for the supervisory authorities to use market information more extensively to improve the identification of troubled banks.
2009-02-10 14:34:37
Banking regulation
Bank failures
Market discipline
Early warning signals
Economics not elsewhere classified