Market forces are not a substitute for government regulation of banks. That's the conclusion of University of Missouri professor John R. Hall and Federal Reserve Bank of St. Louis economists Andrew P. Meyer and Mark D. Vaughan.

Looking at stock data from 1988 to 1993, the researchers found that investors were keenly aware of credit risk, remembering the crises in lending to real estate developers and developing countries. The market, however, failed to distinguish between adequately capitalized and well capitalized institutions.

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