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.