INTRODUCTION

China has gradually change from a planned economy into amarket economy model through this three decades，but in the financial industry，the development ofmarket economy is not perfect from a macroeconomic perspective.Chinese financial industry is still a government-led industry，and the control of the financial sector by the Chinese government is strong.The strong control embodies in the nature of state-controlled commercial banks；the central bank develop the unified depositand lending rate；and the control of the size of credit and other aspects.Although financil liberalization has been controversial，national security and political stability for the financial and other considerations mustbe necessary for the implementation of financial sector regulation.But it is undeniable that the financial market can increase economic efficiency in the regulation of resource allocation.So steadily promote financial market development for China's economic development has important practical significance.The indirect financing of Chinese enterprises is still bank loans，from the micro perspective of banking.In this context to strengthen banking supervision in China's sense of risk is particularly important.China Banking Regulatory Commission's regulation of banking industry has been relying on Basel and China's national conditions.The three regulatory pillars of Basel are：（1）captital adequacy regulation；（2）supervision of regulatory authorities；（3）market discipline.The so-calledmarket discipline is the play ofmarket forces on the risk of the banking sector constituted constraints，which form a market-oriented regulatory mechanisms.

So themarket discipline is the collection of market economy and the regulatorymechanism.As the third pillar of Basel Ⅱ，market discipline in the regulation of commercial banks plays an irreplaceable role.

This book aims to use the analyticalmethod from general framework to details combine with finance branch and the important principles of mathematics.and apply of measurementmethods and detailed data on market discipline of Chinese commercial banks to conduct theoretical analysis and empirical research.This book aims to establish a comprehensive study of the subject ofmarket discipline：depositors，crediors，shareholders and the game between the banks and the market discipline by theory models.In empirical，this book analyzes the actual data of Chinese commercial banks，studies the main rules and mechanisms how the market discipline plays its banking supervision，and explores the development of market discipline in our country combined with Chinese reality.This book draws some conclusions on how to promote banking supervision by market discipline，and makes the outlook of the development of Chinese banking regulatory.

This book contains eight chapters.The first chapter introduces the background of issues，the ideas，methods，features，and the innovation of this book.The second chapter is about the reviews of the literature and the theory.This chapter reviews the important documents of the market discipline and related content，and summarizes the mechanism of market discipline.This chapter discuss the history of market discipline，the general principles of market discipline，the contents of market discipline，subjects（depositors，the investors of subordinated debt，shareholders et al.）.This chaper briefly analyzes the conditions of market discipline and also analyzes the contact of market discipline and the other two pillars.This book begins to analyze the subjects of market discipline from the third chapter.The third chapter discusses the market discipline from the perspective of depositors.Theoretical part describes the mechanism and significance of depositors in market discipline，while the empirical part makes a statistical description and quantitative analysis of depositmarket.The forth chapter discusses the market discipline from the perspective of subordinated debt market.By application of asset pricing theory，we use themathematicalmodels to derive how subordinated debt investors play the role of market discipline，and analyze the changes of other related subjects after the introduction of commercial bank subordinated debt.In the light of the large-scale cross-ownership of the subordinated debts of domestic commercial banks，this book attempts to investigate the implication of the cross-ownership of subordinated debts，bymeans of the establishment of related mathematicalmodels and the application of numerical analysis.The fifth chapter analyzes the market discipline from the perspective of the shareholders in the stock market transactions.This chapter discusses the content，the significance and the ways of shareholders market discipline.The GMM dynamic panel analysis is used to analyze the stock trading market discipline in empirical part.whose conclusion shows that stock market volatility in trading of non-systematic constitutes the market discipline.The sixth chapter discusses the environment that impactsmarket discipline.And what games commercial bankswillmakewhen they face to the market discipline.This chapter also discusses the relationship between market discipline and information disclosure.If there ismarket discipline，or the expection of market discipline，commercial bankswillmake earningsmanagement，capitalmanagementand regulatory capital arbitrage games and the external environment impact on market discipline.The seventh chapter summarizes the developmentofmarket discipline in our country，and also analyzes how to practice the market discipline in our country.The eighth chaptermakes the general conclusions of this book and the future research directions.

This book draws the conclusions through theoretical and empiricalanalysis：first，market discipline play an irreplaceable role in commercial banks regulation.Second，Chinese commercial banks'market discipline is still weak，especially in the depositors and subordinated debtmarkets.Third，some commercial banks will make earnings management，capital management and other games when they face the market discipline.Market discipline will promote other two pillars of Basel.Fourth，the development ofmarket discipline in Chinese banking industry is necessary and important，sowemust strengthen themarket discipline，that is crucial to the healthy development of Chinese commercial banks.

During the course of writing this book，I appreciate the Professor Xing Tiancai of Dongbei University of Finance and Economics，Professor Zhao Shengmin of NankaiUniversity，Wang Xiaosong of Renmin University of China，Xu Youchuan of Fudan University，Fang Yi of Central University of Finance and Economics，Zhang Yongchao of Northeastern University，the inspiration given bymy students and wore importantly，thanks the love from my parents.These giveme the motivation to continue to move forward in scientific research.

Zhai Guangyn

Dongbei University of Finance and Economics July 26，2014