Inside the 'Black Box' of Market Discipline
7 Pages Posted: 15 Mar 2005
This article considers the role of market monitoring and discipline in policy orientated towards maintaining financial stability. Although it is widely assumed that markets have a potentially powerful role in disciplining banks, the precise mechanisms are not always clear. In this sense, market discipline is something of a 'Black Box'. The purpose of this article is to consider the precise mechanisms within the Black Box and to outline the required conditions for market discipline to be effective. It is found that there is much that policy-makers can and should do to enhance the effectiveness of market discipline and to ensure that market discipline is not impeded.
Suggested Citation: Suggested Citation