Fundamentals of market discipline and custody risk management

Abstract

The importance of market discipline has been rapidly growing at both the
regulatory and market levels in recent decades. However, firm/system-wide
financial failures during the global financial crisis supported the idea of
more regulation. The result has been, in the author’s view, excessive or
over-regulation at the expense of market discipline and its proven insights.
This paper asks whether market discipline could provide an effective tool for
firm/system-wide risk management. As an extension of the existing market
discipline literature, the paper also attempts to analyse connections between
market discipline, disclosure and management of custody risks.