Market Discipline
Barron's Banking Dictionary:
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Market Discipline
Public disclosure of a bank's financial condition to depositors and other interested parties. Regular disclosure of a bank's equity capital and its major liabilities are promoted by banking regulatory agencies as an incentive for banks to maintain adequate capital to cushion against potential losses. According to the theory, depositors, creditors and others will want to do business with financial institutions that meet, or surpass, the recommended Risk-Based Capital standard, a base guideline for banks doing business internationally.
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Market Discipline
Investopedia Financial Dictionary:
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Market Discipline
The onus on the banks, financial institutions and sovereigns to conduct business while considering the risks to their stakeholders. Market discipline is a market-based promotion of the transparency and disclosure of the risks associated with a business or entity. It works in concert with regulatory systems to increase the safety and soundness of the market
Investopedia Says:
The risks associated with partial ownership in a company can decrease the likelihood of involvement in the market. Market discipline increases the information available to the public by encouraging the release of timely information detailing a company's assets, liabilities and general financial information. This reduces the uncertainty and promote the function of the market as an exchange between lenders and borrowers.
For example, the capital requirements for a bank might be to keep 1% in reserves. Market discipline, on the other hand, encourages banks to keep a higher amount to reduce their liquidity risks and increase the confidence of their depositors.
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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