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Title: Did the market signal impending problems at Northern Rock? An analysis of four financial instruments
Authors: Hamalainen, Paul
Pop, Adrian
Hall, Maximilian J.B.
Howcroft, Barry
Keywords: Banking regulation
Bank failures
Market discipline
Early warning signals
Issue Date: 2008
Publisher: © Loughborough University
Series/Report no.: Loughborough University. Department of Economics. Discussion Paper Series;WP 2008 - 11
Abstract: 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.
Description: This is a working paper. It is also available at: http://ideas.repec.org/p/lbo/lbowps/2008_11.html
Version: Published
URI: https://dspace.lboro.ac.uk/2134/4203
ISSN: 1750-4171
Appears in Collections:Working Papers (Economics)

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