Moreover, safety-net provisions may also alter the incentives of market agents to respond appropriately to the receipt of new information.11 Finally, it would be simply naive to assume that the markets will always exercise discipline appropriately.
Throughout history, there have been instances recorded of excessive price volatility in financial markets, “bubbles” and other misalignment of financial asset prices.12 Moreover, banks and other financial institutions, buoyed by waves of “excessive optimism” or even “irrational exuberance”,13 have frequently lent large sums of money to borrowers who ultimately proved unable to pay.