Market Discipline

AAA

DEFINITION of '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 EXPLAINS 'Market Discipline'

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.

RELATED TERMS
  1. Basel Committee On Bank Supervision

    A committee established by the central bank governors of the ...
  2. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  3. Basel I

    A set of international banking regulations put forth by the Basel ...
  4. Full Disclosure

    1. The U.S. Securities and Exchange Commission's (SEC) requirement ...
  5. Capital Requirement

    The standardized requirements in place for banks and other depository ...
  6. Basel Accord

    A set of agreements set by the Basel Committee on Bank Supervision ...
RELATED FAQS
  1. What are the top high yield bond ETFs?

    Three of the most popular high-yield bond exchange-traded funds, or ETFs, are the Peritus High Yield ETF (HYLD), the SPDR ... Read Full Answer >>
  2. What is the formula for calculating beta?

    Beta is a measure used in fundamental analysis to determine the volatility of an asset or portfolio in relation to the overall ... Read Full Answer >>
  3. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  4. How is portfolio variance reduced in Modern Portfolio Theory?

    According to modern portfolio theory, or MPT, portfolio variance can be reduced by diversifying a portfolio through the inclusion ... Read Full Answer >>
  5. What are the advantages of portfolio planning with the efficient frontier?

    The advantages of portfolio planning with the efficient frontier are based in Harry Markowitz's modern portfolio theory (MPT), ... Read Full Answer >>
  6. Which is better: dollar cost averaging or value averaging?

    Historical comparisons seem to indicate that value averaging (VA) tends to outperform dollar cost averaging (DCA), offering ... Read Full Answer >>
Related Articles
  1. Investing Basics

    The Flow Of Company Information

    Learn how to gather all the pieces before you start to put together your puzzle.
  2. Retirement

    Common Clues Of Financial Statement Manipulation

    Search for the "bloody" fingerprints in accounting crimes.
  3. Insurance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  4. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  5. Investing Basics

    Know When To Buy & Hold It, Know When To Fold It

    A passive buy-and-hold strategy using ETFs is one of the most efficient ways of building a portfolio.
  6. Trading Systems & Software

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  7. Charts & Patterns

    Pros & Cons Of A Passive Buy And Hold Strategy

    Forget market timing: we look at the pros and cons of the tried, tested, and true strategy of buying and holding stocks for the long-term.
  8. Personal Finance

    Financial Tips For People Who Hate Finance

    For people who hate financial planning, there's usually one big problem – which you can fix. Do it now.
  9. Investing

    Seven Investing Books For Your Summer Reading List

    It’s almost 4th of July, the season of summer reading. Picking up a book during your holiday can be a great opportunity to learn more investing.
  10. Investing Basics

    Understanding Related-Party Transactions

    In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!