Does Market Discipline Impact Bank Charter Value? The Case for Australia and Canada

Abstract

This paper analyses the relationship between market discipline and bank charter value using a panel dataset of publicly-listed domestic banks in Australia and Canada over the 1995-2011 periods, with particular focus on the 2007/2008 global financial crisis (GFC). Overall, our results show a positive relationship between market discipline and bank charter value, although this has reduced in the post-GFC period. Furthermore, our findings reveal that in the presence of market discipline, bank capital, contingent liabilities, and non-interest income are important sources of charter value. These findings have important policy implications related to bank safety and soundness. The results are robust to model specification.