Effective market discipline can complement bank supervision and regulation. But its prerequisite is having the information necessary to understand the risks in the entity the market is observing. With sufficient, timely, accurate, and relevant information, market participants can better evaluate counterparty risks and adjust the availability and pricing of funds to promote better allocation of financial resources.
Lenders and investors have an obvious interest in meaningfully assessing a firm's risk-management performance, underlying trends, cash flow, and income-producing potential. In this regard, transparency is essential to providing market participants with the information they need to effect market discipline. Sound, well-managed companies can benefit if enhanced disclosure enables them to obtain funds at risk premiums that more accurately reflect their lower risk profiles.