Market discipline is a term which describes the restraint implicitly required of financial services companies in order to remain solvent and financially strong in the face of market pressure instead of regulatory pressure.
The markets can sometimes make a ruling on which companies were conducting their business according to prudent and ethical guidelines, without the need of an SEC audit or the intervention of any other regulatory agency. The companies that weren’t will lose their customers and go bankrupt, in no particular order.
Most of the regulations in place for the financial services industry are there to protect the consumers and the economy as a whole, but the banks and companies involved usually have an interest in self-preservation, and in looking good for their customers and shareholders, that leads them to take precautionary measures over and above the requirements of any regulations.
Banks and insurance companies, for example, have very well-defined capital reserve requirements, but market discipline will often lead them to exceed the requirements. In the new international banking resolutions of the Basel Accord, the 3rd Pillar is market discipline.
They gently force market discipline on to banks by recommending and in some cases requiring that their books are transparent and visible to market participants. This allows the market to self-regulate when it has enough information to work with.
Part of the reason that the other pillars of the Basel Accord had to be mandated is because the market discipline had been largely removed from the banking industry over the years due to the removal of much of the risk for making loans through mortgage insurance and collateralized debt.
In general, bonds rated below BBB on S&P and Fitch's scales are typically called "junk bonds." These bonds usually...
Municipal bonds funds invest exclusively in tax-advantaged municipal bond issues. Municipal Bond Funds invest in...
S-Corporations, also called S-corps, are a cross between a traditional corporation and an LLCa
A 403(b) Plan is essentially a 401(k) for publicly-funded institutions such as public schools and universities
Contributions for employees must be made within 30 days after a pay-period, while employers match before the tax deadline
Keogh plans are any type of qualified plan at a sole proprietorship or partnership
AAA/Aaa is the highest rating a bond issue or company can get. In the aftermath of the 2008 financial crisis and...
An Account Hold is similar to the term Account Freeze, as both imply that transactions have been suspended for an account
Turnover ratio is a term that can be used in reference to the rate at which a company goes through its physical inventory
A consolidated tax return is a single filing that covers several subsidiary companies and their parent company