Market discipline

The pressure on banks from investors and counterparties who can see their risks. Basel Pillar 3 requires disclosures to support it.

Where you will meet it

Market discipline comes up in 5 learning outcome notes across the FRM syllabus. A few of them:

• Banks
  FRM Part I · Financial markets and products

  “They were minimum capital for credit, market and operational risk, supervisory review, and market discipline through disclosure.”

• Risk Reporting
  FRM Part II · Operational risk and resilience

  “Public disclosure under Pillar 3 of the Basel framework exists to support market discipline.”

• Banks
  FRM Part I · Financial markets and products

  “Insured depositors have no reason to monitor the bank or to demand a higher rate from a risky one, so market discipline weakens.”

• Capital Regulation Before the Global Financial Crisis
  FRM Part II · Operational risk and resilience

  “Pillar 3 is market discipline through public disclosure of risk exposures and capital adequacy.”

All terms beginning with M · FRM glossary

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