In this way subordinated debt could be used to bring indirect market discipline on a bank. Supervisory Discipline Must Be An Effective and Dynamic Second Line of Defense While market discipline must be our first line of defense for ensuring financial stability, bank supervision also has an important role to play.
The very nature of a systemic disruption, which imposes costs on not only the perpetrators, but also on many and diverse economic agents far removed from the immediate event, means that market participants find it impossible to fully incorporate systemic risks into market prices.