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A major theme in the literature on bank regulation is that greater reliance on market forces can mitigate the moral hazard problem inherent in government sponsored deposit insurance. Specific proposals to impose greater market discipline on banks include minimum requirements on (1) uninsured subordinated debt financing (either fixed-term or with option-type features), and (2) private coinsurance on deposits. Both proposals amount to delegating the responsibility for bank regulation to various private sector claimholders. The results suggest that such delegation (with or without claims that include option-type features) may be ineffective in lowering bank risk, at least within the present regulatory and institutional framework. Alternative mechanisms exist that can mitigate the moral hazard problem; however, it may be necessary for the regulator/deposit insurer to be an integral part of the solution.

This chapter examines the effect of creditors’ monitoring role on the profitability of firm acquisitions. We use the shares retained by the lead arranger of a syndicated loan as a proxy for monitoring level. We find that acquirer announcement returns are positively related to the shares retained by the lead arranger. The effect of the lead arranger’s shares on the acquirer’s return becomes pronounced in cash acquisition deals, and when there exist financial covenants. Our results suggest that lead arrangers are important not only for monitoring loans but also for successful acquisitions by borrowers. An important policy implication of the main findings of this chapter on bank monitoring is that policy makers should design financial covenants to improve the efficiency of monitoring activities by lead arranging banks in syndicated bank loan deals.

The purpose of this paper is to investigate whether the quality of the credit process is sensitive to reaching a particular threshold level of non-performing loans (NPLs) and, more importantly, whether higher NPLs ratios could make the monitoring activity ineffective.

The empirical design is composed of two steps: in the first step, the authors introduce a monitoring performance indicator (MPI) of the credit process by combining the non-parametric technique Data Envelopment Analysis with some financial ratios adopted as input and output variables. As second step, the authors apply a threshold panel regression model to a sample of 298 Italian banks, over the time period 2006–2014, and the authors investigate whether the quality of the credit process is sensitive to reaching a particular threshold level of NPLs.

This paper finds that, first, when the NPLs ratio remains below the threshold value estimated endogenously, an increase in the quality of monitoring has a positive impact on the NPLs ratio. Second, if the NPLs ratio exceeds the estimated threshold, the relationship between the NPLs ratio and quality of monitoring assumes a positive value and is statistically significant.

Due to the lack of data, the investigation of NPLs in the Italian industry across loan types combined with the monitoring effort by banks management was not possible. The authors plan to investigate this topic in future studies.

The identification of the threshold has a double operational valence. The first regards the Supervisory Authority, the threshold approach could be used as an early warning in order to introduce active control strategies based on the additional information requested or by on-site inspections. The second implication is highlighted in relation to the individual banks, the monitoring of credit control quality, if objective and comparable, could facilitate the emergence of best practices among banks.

A high NPLs ratio requires greater loan provisions, which reduces capital resources available for lending, and dents bank profitability. Moreover, structural weaknesses on banks’ balance sheets still persist particularly in relation to the inadequate internal governance structures. This means that bank management must able to recognise in advance early warning signals by providing prudent measurement together with an in-depth valuation of loans portfolio.

The originality of the paper is twofold: the authors introduce a new proxy of credit monitoring, called MPI; the authors provide an empirical proof of the Diamond’s (1991) economic intuition: for riskier borrowers, the monitoring activity is an inappropriate instrument depending on the bad reputational quality of borrowers.

This study aims to examine the impact of board characteristics on debt choice.

The sample comprises of unique nonfinancial firms listed in the FTSE 350 over the period 2011–2018. This study uses Tobit and OLS regressions to check the impact of board characteristics on debt choice. The results are robust to the battery of robust checks.

This study finds that board size and board independence are positively associated with public debt. However, CEO duality and board meetings frequency are inversely associated with public debt. Overall, the findings are consistent with the “financial intermediation theory” that the firms with weak governance rely on bank financing, and firms with better corporate governance go for public debt.

This study offers significant insights for investors and policymakers.

This study offers new insights regarding the role of board characteristics in firms’ debt choice by showing the significant impact of board characteristics on debt choice. The findings indicate that the board’s efficient internal monitoring may substitute external monitoring by the bank.

The purpose of this study is to investigate the two components of market discipline, investment account holder (IAH) monitoring and the consequent reaction of the Islamic banks in GCC countries for the 2004–2013 period, including the recent financial crisis of 2008.

We address the research question that Investment Account holders (IAH) in GCC countries suc as Kingdom of Saudi Arabia (KSA), Bahrain and United Arab Emirates (UAE) monitor their banks. Regression analysis was used to examine the dependence level of profit-sharing investment account (PSIA) growth rate on bank risk characteristics (CAMEL variables). Then, the reaction of banks by regression influencing CAMEL variables of one-lagged period on PSIA growth rate was verified.

The results provide evidence of the first component of market discipline, i.e. the IAH monitoring, in KSA, Bahrain and UAE. The common result to the three countries is that market actors are concerned with accounting information on capital adequacy. However, in UAE, they are also interested in assets performance, whereas they look more at earnings in Bahrain. The results show evidence of the second component in Bahrain; the bank reaction to IAH monitoring and subsequently IAH discipline in Bahrain. Finally, the results do not support any impact of the financial crisis.

The sample size is small although it is constituted by banks having a sufficient number of observations.

This study highlights the importance of IAH discipline, which would help prudential bank monitoring by regulators and wealth development for both investors and managers. It should increase the disclosure of relevant information as for the part of effective accountability of Islamic banks’ governance.

This study contributes to the literature on market discipline by dealing with Islamic banks. It is one of the very few studies to investigate IAH discipline in Islamic banks and the second component of market discipline, i.e. the influence of monitoring on banks.

The aim of this paper is to examine the question of the specialness of banks by addressing concerns raised in the recent studies and deriving policy implications for the future of banking. The specialness of banks has been well documented in the finance literature. More recent research, however, calls into question the special nature of banks.

We use event study methodology to study 423 bank loan announcements from 1988 to 1996 and examine the returns relative to proxies for the bank ' s monitoring incentives and skill using ordinary least squares (OLS) regressions.

Our results indicate borrower abnormal announcement returns are positively related to proxies for the bank ' s monitoring incentives and skill as measured by: the ratio of uninsured deposits to total loans; a risk-adjusted measure of recovered charge-offs; and the relative bank-to-borrower capital ratio.

The results reveal how the fragile nature of the bank ' s structure improves the bank ' s incentives to monitor borrowers.

Our results can inform the current debates in the Fed and in Congress surrounding reapplying the Glass-Steagall Act and limiting the size of banks. We show that banks were special before the Gramm-Leach-Bliley Act and when fewer banks belonged to the too-big-to-fail category. This suggests that reregulating banks to re-establish their fragile nature will re-establish them as information-generating intermediaries instead of just transactional institutions.

Our findings have not previously been documented but are broadly consistent with models developed by Calomiris and Kahn (1991) and especially Diamond and Rajan (2001).

Corporate governance is regarded as a major issue during the post-financial crisis period in Asia. These countries have implemented corporate governance reforms to enhance the protection of shareholders and stakeholders interests. Such reforms have affected the conduct of business of all corporations in the region as it allows for greater monitoring especially by the shareholders. Unlike earlier studies which focused on non-financial firms, this study analyzes the corporate governance of listed banking firms in nine Asian emerging markets. Corporate governance mechanisms that serve to monitor the banking firms can be classified into Ownership Monitoring Mechanism, Internal Control Monitoring Mechanism, Regulatory Monitoring Mechanism, and Disclosure Monitoring Mechanism. This paper suggests that there are differences in the monitoring mechanisms of banking firms and non-bank firms.

This paper extends a recent study on financial dollarization of Broda and Levy Yeyati (2003) by introducing a lending of last resort intervention contingent both on banks’ portfolio currency composition and on banks’ monitoring effort. We show that when the lender of last resort commitment to intervene is matched with some operational discretion, according to a “constructive ambiguity” approach, then the provision of emergency liquidity may be crucial to enable distressed, but well-behaved banks, to survive and finance “high quality” investment projects.

Banks are the major suppliers of external funds for companies in China. The purpose of this paper is to examine whether Chinese banks exercise effective monitoring over borrowers in two lending decisions, including loan interest rates and loan renewals.

Using a sample of Chinese public industrial firms from 2000 to 2005, the authors perform multivariate regression analysis to investigate whether banks adjust their loan interest rates and consider loan renewal decisions in response to borrowers financial performance. The authors also examine these bank lending decisions before and after 2003, when the major banking reforms started to take place in China.

A negative relation was found between the loan interest rate spread and the financial performance of borrowers. However, a negative relation was found between loan renewals and the financial performance of borrowers, consistent with firms in financial difficulties being in need of more funding and hence more likely to get its bank loans renewed. Additionally, it was found that the factors banks consider when making loan decisions vary before and after 2003.

The authors' findings suggest that Chinese banks play a limited role in monitoring and disciplining borrowers through adjustments of loan interest rates, and that their loan renewal decisions for firms with poor financial performance highlight banks' financing, instead of monitoring role in this transition economy. These findings provide empirical evidence on bank governance in a transition economy dominated by state‐owned enterprises. The paper contributes to the literature by constructing an alternative loan renewal measure using financial statement information.

We investigate whether external investment banks or internal key IPO insiders such as company directors and officers, venture capitalists and institutions that hold an IPO's stock serve as effective monitors of IPO investments over the post-IPO period. We measure median changes in each group's holdings for the sample, finding large changes in these values during a long-run holding period. We find that long-run buy-and-hold returns (BHARs) are positively related to the lead investment bank underwriter reputation and the gross spread demonstrating that the external monitoring by investment banking firms increases the post-IPO firm's value. Holding the underwriter reputation constant, we find that the BHARs are positively related to the gross spread, also indicative of the value of monitoring by external investment banks.