Market Discipline by Bank Governance in Managing Credit Risk

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Author	Mohamed Sadok Gassouma, Mohamed Tahar Rajhi
ISSN	2307-2466
On Pages	499-507
Volume No.	2
Issue No.	7
Issue Date	December 01, 2020
Publishing Date	December 01, 2020
Keywords	market discipline, bank governance, credit risk, agency relationship

Abstract

The present paper aims to study the various forms of the market discipline by bank governance in managing the credit risk. The first form refers to the agency relationship between shareholders and managers in which we find a concentrated structure and an average involvement of the manager in the capital which can guarantee a good regulation of the credit risk. The second form reflects the agency relationship between depositors and shareholders. The former exert a control over both shareholders and managers so as to reduce the risk. The third form, on the other hand, examines the agency relationship between managers and creditors; the latter party exerts an effective control over the former in case they are not well protected against the risk of bankruptcy. The fourth discipline is performed by the Board of Directors and mainly by outsiders. All these forms can be stranded by the strong involvement of managers in the capital and the high interest rates granted to creditors and to depositors. These four discipline forms of bank governance have been studied in a Tunisian setting. Results indicate that market discipline is checked only by the concentration of institutional outsider ownership, the nationalization of ownership and by depositors but remains untested by both the Board of directors and the creditors.

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