But while ex ante restrictions on ex post government assistance may increase market discipline and thus mitigate somewhat the amounts of risk and exposure in the system, such restrictions alone will not make financial actors willing to deal with one another when a serious dislocation nonetheless occurs.
A characteristic of a financial crisis is that the bursting of asset bubbles, shortage of liquidity, and sudden fragility of leverage combine with the opaque nature of the balance sheets of financial firms to produce high – sometimes extreme – levels of uncertainty as to how to value assets and assess the soundness of counterparties.