USING MARKET-INFORMATION IN PRUDENTIAL BANK SUPERVISION - A REVIEW OFTHE US EMPIRICAL-EVIDENCE

In principle, market and government supervision provide alternative de vices for controlling (governing) any type of corporation. Most nation al governments have instituted nonmarket regulatory mechanisms for ban king firms, on the grounds that market-based mechanisms do not adequat ely discipline banks. But what evidence supports this assessment? Why must governments assure bank solvency, but not the solvency of other f irms? Government oversight naturally displaces private efforts to eval uate and control financial firms. Moreover, if the banking business ch anges over time-as it assuredly has in the past decade or two-the best combination of government and private supervision may change concurre ntly. This paper reviews and evaluates the growing empirical literatur e on private investors' abilities to assess the financial condition of banking firms. The evidence supports the proposition that market inve stors and analysts could reasonably provide a greater proportion of co rporate governance services for large, traded U.S. financial firms.