In the past, it has been argued that market discipline can play a key role in incentivising market participants to limit their excessive risk taking activities. However, the events of the last few years have proved the inadequacy of market discipline and bankers have been engaged in risk-taking activities disguised as value-creation.
Time and again market participants have engaged in herd behaviour and put the financial system at risk. It is poignant to note how relevant Charles Mackay’s observation in his popular book Extraordinary Popular Delusions and Madness of Crowds, written in 1841, even today.