Market discipline holds institutions accountable for their actions from "summary" of Financial Markets and Institutions, Global Edition by Frederic S. Mishkin,Stanley G. Eakins
Market discipline is a crucial mechanism that plays a significant role in ensuring that financial institutions are held accountable for their actions. It involves the use of market forces, such as competition and investor scrutiny, to regulate the behavior of institutions in the financial sector. Essentially, market discipline acts as a form of oversight that helps to deter risky behavior and promotes responsible practices within the industry. One way in which market discipline holds institutions accountable is by influencing their risk-taking behavior. When financial institutions are aware that their actions are subject to market scrutiny, they are more likely to act prudently and avoid excessive risk-taking. This is because investors and other market participants are quick to react to any signs of irresponsible behavior, which can lead to a loss of confidence and a decrease in the institution's market value. Moreover, market discipline also incentivizes financial institutions to be tr...
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