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.