What role, if any, can market discipline play in supporting macroprudential policy?

Abstract

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

La disciplina de mercado es condición necesaria para preservar el contenido informativo de los indicadores de balance y los precios de mercado como herramientas utilizadas en el análisis macroprudencial. Tanto los indicadores de balance como los precios de mercado son utilizados como indicadores de importancia sistémica y crisis financiera. Tres condiciones son necesarias para que la disciplina de mercado sea efectiva: información veraz y oportuna sobre el perfil de riesgo de las instituciones financieras

los acreedores deben estar expuestos al riesgo

y la reacción a los indicadores de mercado debe ser observable