Summary: The use of market discipline as a complement to bank supervision and regulation has gained greater acceptance in the United States and abroad. It is also widely recognized that effective market discipline depends on market participants' having information about the risks and financial condition of banking organizations. Therefore, attention is being focused increasingly on ways to improve transparency in banking.
Staff of the Federal Reserve System undertook a staff study, Improving Public Disclosure in Banking, to consider initiatives that promote better disclosure in banking. The purpose of the study is to present a set of initiatives that would reinforce the current process shaping disclosure while avoiding additional regulatory requirements. The study lays the foundation for the initiatives by considering how market discipline could supplement supervision in principle and by reviewing the empirical evidence on market oversight and discipline in banking. Key sections of the study discuss the factors shaping public disclosure in banking and identify the strengths and weaknesses of the process. Regarding the potential for market discipline, the study suggests that greater reliance on private-sector oversight in banking can be consistent with the supervisory goals of limiting moral hazard and systemic risk and that the oversight can be effective.
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