Addressing the Information Asymmetry between Banks and Regulators: The Role of Peer Monitoring Discussant Paper Dalvinder Singh, Professor of Law, University of Warwick

Regulation and Supervision Information Flow: Minimise Market Failures Regulator Markets Banks

Mechanisms to Reduce the Asymmetry of Information Bank/State Nexus Corporate Governance Regulation & Supervision External Auditors & Credit Rating Agencies Resolution Planning Macroprudential & Microprudential Oversight Self Regulation – Private Monitoring

Market Discipline fits Mic-Pru-Sup and Mac-Pru-Sup approaches Oversight: Individual Bank Safety Oversight: Banking System as a whole

Markus Brunnermeier et al. 2009 Individual Bank Perspective Sale of Assets when probability of loss is high enhances bank safety. Collective Bank Perspective Asset prices may collapse when more banks follow suite which may undermine bank system safety.

Market incentives distort risk taking The Too-Big-to-Fail Dilemma Moral Hazard Financial Stability Reports indicated a number of Red Flags before the financial crisis which were viewed as idiosyncratic risks rather than system wide risks Risks and Knowable Uncertainties High and Low risk is indistinguishable Minimise poor decision making by improving the ability of banks to distinguish the good and bad counterparties or assets Result in market freezes, liquidity hoarding or capital flight Adverse Selection

Public and Private Mechanisms to Minimise Asymmetry of Information Risks Bonding Screening Signalling Monitoring

Concluding Observations The paper by Murinde et al highlights the pro’s and con’s of utilising market discipline to minimise the agency problems associated with asymmetry of information between banks, regulators and markets It points towards improving the use of market discipline to develop the capacity of regulators to better inform themselves about the stability of the market place

dalvinder.singh@warwick.ac.uk