Market discipline and bank risk taking

Khoa T.A. Hoang, Robert Faff, Mamiza Haq*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

22 Citations (Scopus)


This paper explores the impact of market discipline on bank risk taking. We examine a broad sample of financial institutions from the G7 nations over the period 1996-2010. We apply System Generalized Method of Moments estimation to control for endogeneity and other unobserved heterogeneity in a dynamic panel setting. Our analysis suggests that market discipline helps reduce bank risk (both equity and credit risk). Moreover, we find that this negative impact of market discipline is stronger: (a) in the presence of a risk-adjusted insurance premium; and (b) during the post-global financial crisis period. However, the disciplinary effect of market discipline is not enhanced in the presence of bank capital. We highlight the policy implications of these findings.

Original languageEnglish
Pages (from-to)327-350
Number of pages24
JournalAustralian Journal of Management
Issue number3
Publication statusPublished - Aug 2014
Externally publishedYes


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