Is market monitoring sufficient to prevent financial crises?

The most recent literature on crises points out that financial fragility in the banking and/or corporate sector is at the root of the financial crises in emerging markets. In a recent TILEC discussion paper, María Fabiana Penas (TILEC) and Günseli Tümer-Alkan (Tilburg University) study how Turkish shareholders reacted to changes in banks' measures of financial fragility during the years prior to the 2000/2001 crisis, and how the quality and timeliness of disclosure affected market reaction. They find that improvements in disclosure requirements brought about in 1999 increased the informativeness of accounting statements and that audited statements that showed larger reporting lags were not informative, pointing to the need for improving their timeliness. They also find that shareholders reacted negatively to financial fragility indicators, such as increases in maturity mismatches, currency mismatches, and non-performing loans, showing concerns about the impact on future profits. Therefore, there is evidence that market monitoring took place in the years prior to 2001. However, given the magnitude of the crisis that subsequently unfolded, the study suggests that the finding that securities prices react to financial fragility indicators should not be taken as a guarantee of banks' safety and soundness.