Such private prudential regulation can be impaired - indeed, even displaced - if some counterparties assume that government regulations obviate private prudence. We regulators are often perceived as constraining excessive risk-taking more effectively than is demonstrably possible in practice.
Except where market discipline is undermined by moral hazard, for example, because of federal guarantees of private debt, private regulation generally has proved far better at constraining excessive risk-taking than has government regulation. 2  Recent spikes in some credit default swap spreads do not appear to have induced significant stress, although this experience has been too limited to be definitive.