What role, if any, can market discipline play in supporting macroprudential policy?
This paper focuses on market discipline as a necessary condition to preserve the signaling content of balance sheet indicators and market prices as macroprudential tools. It argues that market discipline enhances the information content of market prices by reflecting the expected private cost of financial distress, including the systemic importance of particular firms. This paper also argues that three conditions are necessary for market discipline to be effective: adequate and timely information on financial institutions’ risk profiles; financial institutions’ creditors must consider themselves at risk; and the reaction to market signals needs to be observable. The paper relies on the existing financial literature and it is particularly timely because policymakers are considering structural measures of banks’ systemic importance as a benchmark for macroprudential policy.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sarai Criado & Adrian van Rixtel, 2008. "Structured finance and the financial turmoil of 2007-2008: and introductory overview," Banco de Espa�a Occasional Papers 0808, Banco de Espa�a.
When requesting a correction, please mention this item's handle: RePEc:bde:opaper:1202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mar�a Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de Espa�a)
If references are entirely missing, you can add them using this form.