Law Commons^™

Interbank Discipline, Kathryn Judge

Faculty Scholarship

As banking has evolved over the last three decades, banks have become increasingly interconnected. This Article draws attention to an effect of this development that has important policy ramifications yet remains largely unexamined – a dramatic rise in interbank discipline. The Article demonstrates that today's large, complex banks have financial incentives to monitor risk taking at other banks, They also have the infrastructure, competence, and information required to be fairly effective monitors and mechanisms through which they can respond when a bank changes its risk profile. Interbank discipline thus affects bank risk taking, discouraging banks from taking some types of …