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

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

3. 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

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

5. 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.

6. 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

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

8. 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