A Third Pillar of Bank Supervision

1. Describe the roles of on-site examination, off-site surveillance, and capital requirements in bank supervision.

2. What is market discipline as it applies to banking? How could it assist bank supervisors and improve upon the traditional means of supervision?

3. Would financial market discipline work if debt holders believe government will bail them out when a bank fails? Why?

4. Could financial market discipline be beneficial even if bank managers ignore financial market signals? Explain.

5. What is subordinated debt? What basic features are common to proposals that use subordinated debt to introduce financial market discipline into banking? How would these proposals work?

Source: “A Third Pillar of Bank Supervision.” William R. Emmons, R. Alton Gilbert, and Mark D. Vaughan, Federal Reserve Bank of St. Louis The Regional Economist, October 2001, pp. 4-9.