This paper analyzes the influence of market discipline on the risk-taking incentives of banks. It is shown that market discipline reduces risk if banks can credibly commit to a given level of risk before the interest rate on deposits is set. If, however, the bank can readjust the level of risk...

We introduce a framework for analyzing the interplay between credit risk and collateralmarket risk on loan pricing. To do this, we decompose any loan into an unsecured and asecured part. Further we explicitly consider the recovery process. The framework allows usto develop semi-analytical...